Obama Administration Rolls Out New Program to Help Underwater Homeowners

The Obama administration has announced a new initiative to assist troubled homeowners by helping them refinance with government-backed mortgages that cut monthly payments.  The program would also temporarily reduce payments for unemployed borrowers who are actively job hunting.  The government is encouraging lenders to write down the value of loans for borrowers participating in modification programs.  Officials expect this and other in-place federal programs to help between three and four million distressed homeowners over the next several years.  A Treasury Department statement said the initiatives are designed to “balance the need to help responsible homeowners struggling to stay in their homes, with the recognition that we cannot and should not help everyone.”

The thrust of the new initiative, which likely will cause some controversy, is that the government – through the Federal Housing Administration (FHA) – will help owners who are underwater or owe more than their house is worth to refinance.  Estimates are that 11 million households or 20 percent of all mortgage-holders, are underwater.  Many of these homeowners refinanced during the housing boom and took cash, putting them at risk when prices fell.  The homeowners will have to eat some of their losses, but will be in better shape than families who had no option but foreclosure.  By insuring the new loan against the risk of default, the FHA gives the borrower a good reason to make payments instead of abandoning the house.

The program’s success depends on investors’ eagerness to participate.  Over the last three years, the FHA has expanded its mortgage guarantee program to help homeowners cope with the housing crisis.  Today, the FHA guarantees more than six million borrowers, many of whom made small downpayments and currently are underwater.  Approximately $14 billion in TARP funds will fund the project.