WASHINGTON (Reuters) - The Obama administration is hammering out a program to subsidize mortgages in a new front to fight the credit crisis, sources familiar with the plan told Reuters on Thursday, boosting financial markets.
In a major break from existing aid programs, the plan under consideration would seek to help homeowners before they fall into arrears on their loans. Current programs only assist borrowers that are already delinquent.
Wall Street stock indexes quickly retraced earlier losses on the report, with the blue-chip Dow Jones industrial average jumping 245 points, or 3.0 percent, to close just 6 points lower on the day. Earlier in the session, stock prices had been testing lows seen last November on investor worries about the economy.
Under the evolving plan, sources said homes would undergo a standardized reappraisal and homeowners would face a uniform eligibility test.
The administration may also lower the trigger level that decides who would be eligible for relief. Under an existing program, loans are reworked if a borrower is spending more than 38 percent of their gross income on their mortgage.
In an interview, James Lockhart, the regulator who oversees government-controlled mortgage finance companies Fannie Mae and Freddie Mac, told Reuters the industry was eager to have a standardized loan modification standard.
“I’ve talked to all the major servicers -- both the big bank ones and the big independent ones -- and they are all ready to go, they’re chomping at the bit,” Lockhart, the director of the Federal Housing Finance Agency, said. “The other thing they’re asking for standardization.”
However, he declined to speculate on any plans the administration may be considering. The Treasury Department, which is taking the lead role in financial rescue efforts, did not respond to a request for comment.
A rising wave of U.S. mortgage delinquencies has saddled the global banking system with big losses that have led banks to recoil from lending, choking economies around the globe.
U.S. Treasury Secretary Timothy Geithner this week outlined a plan to take up to $1 trillion in bad assets off the banks’ books in the hope of restarting lending.
He also vowed the administration would spend $50 billion to combat foreclosures.
Geithner said on Thursday the administration would soon put a housing program in place that uses “a mix of incentive and persuasion” to get mortgage companies to rewrite loans.
“The key elements of the strategy are going to bring mortgage interest rates down to help avoid the foreclosures that we can reasonably expect to avoid,” he said.
Late mortgage payments and home foreclosures hit record highs last year. Foreclosure filings eased last month, but were still 18 percent higher than a year ago, industry research firm RealtyTrac said on Thursday.
Sources said Fannie Mae and Freddie Mac would play a supporting role in the new plan, but said the two companies are not expected to repackage the reworked loans as securities for investors, a main line of their business.
Homeowners would have to make a case of hardship to qualify for new loan terms, according to the sources.
Officials weighed, but have shelved for now, another plan that would have the government stand behind low-cost mortgages of between 4.0 percent and 4.5 percent, the sources said.
Howard Glaser, a housing official in the Clinton administration, said the type of program under discussion would give officials more “bang for the buck” than the government would get by guaranteeing troubled loans.
“Federal purchase or guarantee of these same distressed mortgages would be vastly and prohibitively expensive,” he said.
Subsidizing existing mortgages would have the added benefit of using the mortgage companies’ existing infrastructure, rather than creating a new bureaucracy.
Lockhart said policy-makers are eager to prevent a large drop in home values from their current, deflated levels.
“Just as we had a large overshooting to the upside. Is there any way to prevent going much further to the downside? That will cause tremendous harm to the U.S. economy, to the financial system and it’s not necessary,” he said.