Feds Launch Broader Mortgage Aid Program

The Wall Street Journal reported today that the Obama administration is launching a mortgage aid program which is aimed at reducing mortgage balances for homeowners who are currently underwater but are not in default.

The federal government has set aside $14 billion as a way to modify between 500,000 and 1.5 million underwater loans that could be modified through the program. Under the new “short refinance” program, banks and other creditors that write down mortgages to less that what the property is worth can, in essence, hand off the reduced loan to the government. The process involves refinancing borrowers into loans backed by the Federal Housing Administration, according to the WSJ article.

Some of the concerns regarding the revised program include the burden on the taxpayers based on officials’ estimates that 20% of those loans in the program could default. According to data from CoreLogic, about 11 million U.S. households, or about 23% of homeowners with mortgages, had negative home equity in the first quarter of 2010. (Here in New York State, 7.1% of homeowners have negative equity — far below the national average).

Another concern is the administration’s intention to concentrate solely on loans bundled by Wall Street firms and sold as mortgage-backed securities. Investors are worried that, if the balances are greatly reduced, they would be wiped out. Mortgage servicers — who handle loan payments and decide on loan modifications — would drown in paperwork and sued by investors who lose their money on risky loans. Borrowers who receive a reduction in principal fear that it will negatively affect their credit score.

But government officials say they are receiving positive feedback on the program from mortgage servicers and investments groups that are able to write down loans. Analysts say that the modified program would most likely succeed on bank-owned loans. In addition, the program could provide investors with a vehicle for getting rid of loans that have been modified and are current again.

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