US launches mortgage plan as homeowners struggle

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The Independent US

The Obama administration today launched a $75bn foreclosure relief plan, as new data showed one in five US homeowners with mortgages owe more than their house is worth.

The mortgage plan, part of a $275bn housing stimulus programme announced last month, enables struggling homeowners to modify loans even if they are "under water."

Homeowners with mortgages on about 8.3 million properties were under water at the end of 2008 and the distress is likely to grow as home values shrink, according to First American CoreLogic.

Having negative equity has previously ruled out refinancing. This new government step aims to reduce payments and prevent looming foreclosures for struggling borrowers and allow standard refinancings for stronger borrowers whose homes values have eroded.

The US Treasury Department unveiled eligibility guidelines for the mortgage modification programme that aims to target the relief to people facing imminent hardship.

In issuing the guidelines, the Treasury opened the door to borrowers who are delinquent in their payments or at risk of falling behind to begin pressing for loan modifications.

The programme, which provides cash incentives to loan servicers to reduce monthly payments, will only modify single-dwelling mortgages up to $729,750 started before 1 January, 2009, with higher limits for multiple-unit owner-occupied properties.

Homeowners who stay current on modified loans will see their principal reduced by up to $5,000 and lenders will get additional incentives for extinguishing second-lien home equity loans.

US home prices have swooned by more than 26 per cent since peaking in mid-2006, based on Standard & Poor's/Case-Shiller indexes, and are widely seen sliding further.

The perfect storm of fast-eroding home values just as unemployment has hurtled to a 16-1/2 year high has propelled foreclosures to all-time highs and thrust the US housing sector into its deepest downturn since the Great Depression.

"There are roughly 2.5 million vacant homes out there for sale, about double what it typically is and that puts downward pressure on prices," said Mike Schenk, senior economist for Credit Union National Association in Madison, Wisconsin.

There is little reason to expect housing, critical to the health of the US economy, to recover soon even if the Obama stimulus adds stability, many strategists contend.

"Labour markets are deteriorating and will continue to deteriorate," Schenk said. "Regardless of how affordable things get, those trends in labour markets are having a huge impact on confidence and on people's ability and willingness to make large financial decisions like purchasing a house."

Requests for loans to buy homes and refinance mortgages dropped for a second straight week last week as potential borrowers held back in hope of even lower mortgage rates and help from the Obama rescue programme.

The Mortgage Bankers Association's total applications index slid by nearly 13 per cent to about half the level it had reached earlier this year when loan rates fell to 4.89 percent. The average 30-year mortgage rate last week was 5.14 percent, the trade group said.

US banking regulators today urged lenders and mortgage servicers to participate in the loan-modification programme to support home loan modifications.

"By providing servicers and holders of eligible residential mortgages with incentives to modify loans at risk of foreclosure, the programme will promote sustainable alternatives to foreclosures," five bank regulators said in a statement.

Foreclosure sales were an ironic bright spot for the ailing housing market in 2008, real estate data company Radar Logic said. These distressed transactions represented as much as a third of all activity last year and surged while all other sales fell.

"Buyers recognize that those are at significant discounts versus what all other people are asking for homes and are migrating to those first," said Radar Logic chief executive Michael Feder.

In addition to details on the loan modification plan, the Treasury announced that lenders could begin refinancing mortgages owned or guaranteed by Fannie Mae or Freddie Mac on homes whose values have dropped.

The Obama administration's plans will help curb monthly payments and spur refinancing, but do little to help potential owners come up with the increasingly large down payments that lenders require, Feder said.

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