Taking aim at the chronically weak U.S. housing market, the Obama administration and a federal regulator on Monday overhauled a government program to help perhaps a million homeowners refinance properties worth less than their mortgages.
The Federal Housing Finance Agency said it would eliminate the loan-to-value cap on refinancings of mortgages backed by government mortgage giants Fannie Mae and Freddie Mac as long as borrowers have been on time with payments.
Interest rates are at historically low levels, but many homeowners have been unable to refinance because their home values have fallen too far. An estimated 11 million U.S. homeowners are locked in mortgages worth more than their homes.
The following is a look at what the government is trying now to shore up the battered housing market and other help that may be on the way for distressed borrowers:
MAKING HOME AFFORDABLE PROGRAM
In March 2009, the Obama administration dedicated $75 billion from its financial bailout fund to help keep borrowers struggling to make mortgage payments on their homes. Known as Making Home Affordable, the program aims to encourage lenders to modify loans or refinance them.
Until the initiative was announced, the government relied on lenders to give struggling homeowners a break voluntarily, which had not made a dent in slowing the wave of defaults.
The marquee foreclosure prevention side of the effort is known as the Home Affordable Modification Program. HAMP offers loan servicers cash incentives to modify the terms of the loan. Servicers act as middlemen between the distressed homeowners and the investors who own the mortgage.
The goal of HAMP was to modify the mortgages for 3 million to 4 million homeowners by the end of 2012. More than two years after it was launched, however, fewer than 817,000 borrowers have received permanent loan modifications under the plan.
REFINANCING TO LOWER RATES
The Home Affordable Refinance Program -- the program overhauled on Monday -- is a counterpart to HAMP that was designed to help borrowers who owe more than their homes are worth to refinance into mortgages with lower interest rates.
The FHFA on Monday said it would eliminate a 125 percent loan-to-value cap on HARP refinancings of loans that were purchased by Fannie Mae and Freddie Mac before May 31, 2009.
With the first loan closings expected early next year, the plan will rely on computerized valuation models in lieu of appraisals. To encourage faster repayment of principal, fees will be waived for borrowers who refinance into fixed-rate loans with terms of less than 30 years.
FHFA says the changes will reduce Fannie Mae and Freddie Mac's credit risk by making loans more sustainable and reducing foreclosure risks.
By the end of 2013, the changes could more than double the nearly 894,000 loans that have been refinanced under HARP so far, according to FHFA. But that is still a small fraction of those with underwater mortgages. It does not aid privately securitized mortgages originated during the housing boom.
The Neighborhood Stabilization Program was started in 2008 and provides funds for state and local authorities to encourage redevelopment and rehabilitation of abandoned and foreclosed properties.
About $7 billion has been set aside for the program, which primarily grants funds to nonprofits in blighted communities.
The funds, overseen by the Department of Housing and Urban Development, often help local communities purchase foreclosed homes and either rehabilitate them or tear them down. It is not an anti-foreclosure effort. Instead, it is a tool to stabilize home prices in areas hard hit by foreclosures.
FHA SHORT-REFINANCE OPTION
The Federal Housing Administration's short refinance option, which was made available to borrowers in September 2010, helps underwater borrowers refinance into new 30-year fixed rate loans backed by the FHA.
The program is available to borrowers with FHA loans, which are targeted at borrowers who often make low downpayments.
The program was initially expected to reach between 500,000 and 1.5 million borrowers, but only a few hundred borrowers have successfully used the short-refi option.
The FHA does not make loans directly, but guarantees them against default. The government has set aside about $8 billion to provide coverage to lenders for a share of potential losses on these loans.
U.S. banks have also been conducting their own mortgage modification programs since 2008.
Spokespeople for Bank of America Corp, JPMorgan Chase & Co and Wells Fargo & Co, the three largest U.S. mortgage servicers, said the banks look at opportunities for reworking loans if borrowers do not meet the standards for a government-backed mortgage modification, and the loans are held on their books or with outside private investors.
All conduct proprietary modification programs that can extend the term of a loan to 40 years from 30, modify the interest rate and, in some cases, cut loan principal.
Bank of America has modified 650,000 loans since January 2008 through the end of August under its own programs, and 102,000 second lien modifications; Wells Fargo changed 608,000 mortgages for borrowers from January 2009 through the end of August, including forgiving $4 billion in principal on some loans; and JPMorgan has offered modifications on 473,000 loans, as of the September 30, and completed 200,000 modifications.
The three banks combine to make up roughly half of the U.S. mortgage-servicing market.
FORECLOSURE ABUSES SETTLEMENT
Negotiations to resolve a long-running probe into servicing and foreclosure abuses by top banks could result in up to $25 billion in relief for homeowners. Talks on the amount and use of the settlement are ongoing, but much of it could come in the form of more extensive loan modifications, people familiar with the talks say.
About $14 billion to $16 billion is likely to be used by the banks to reduce principal for underwater borrowers and assist with other alternatives to foreclosure. Part of the money is also expected to be used to help foreclosed borrowers with transition assistance and short sales. The amount of relief is likely to be more than what is credited to banks' balance sheets, since they may have to take losses on severely delinquent second loans, for example.
Some $4 billion to $6 billion is likely to be split among states to help with counseling and other assistance for distressed borrowers. Each state will decide how to spend its portion, but could also use the funds to pay for deferred costs on maintaining properties, or for law enforcement efforts.
The banks, which include Bank of America, JPMorgan, Wells Fargo, Citigroup, and Ally Financial, could also commit another $2 billion to $5 billion to help underwater borrowers who are current on their payments refinance their loans.
(Compiled by Margaret Chadbourn, David Lawder, Aruna Viswanatha and Joe Rauch; Editing by Andrew Hay)