Obama Considers Spending Plan to Cut Payments on Mortgages Nearing Default

WASHINGTON -- President Obama's administration is considering spending taxpayer dollars to cut monthly payments for homeowners on the verge of foreclosure, according to two people briefed on the proposals.

The deliberations came as lawmakers prepared to enact a new tax credit of up to $8,000 for first-time homebuyers that is intended to boost the ailing housing market.

Details of the plans to aid troubled borrowers were not final but were expected to be unveiled in the coming weeks, according to the people who declined to be identified because the details were not yet complete. The effort would be part of a plan to spend $50 billion on foreclosure prevention and establish national standards for modifying home loans.

The administration has several ways it could spend money to stem foreclosures.

It could follow a proposal by Sheila Bair, chairman of the Federal Deposit Insurance Corp., who wants to give banks an incentive to reduce borrowers' payments by having the government absorb some of the losses should loans fail again.

Or, the government could direct federal dollars to loan modifications. If a lender, for example, agreed to reduce a borrower's rate, the government could subsidize a further interest rate drop.
Still, deciding who would qualify would be a challenge, especially as foreclosures continue to soar. More than 274,000 U.S. households received at least one foreclosure-related notice last month, according to RealtyTrac Inc.

The Obama administration also is expected to back a push in Congress -- opposed by the mortgage industry -- to let bankruptcy judges alter the terms of primary home loans. Earlier this week, Obama said it "makes no sense" that judges are not allowed to do so. The mortgage industry argues that this prohibition allows lenders to charge lower rates.

Meanwhile, the new tax credit for first-time homebuyers that's included in the economic stimulus package was far less than the homebuilding industry wanted. Analysts expect the credit to provide only a modest boost to the battered U.S. housing market.

First-time buyers are defined as those who haven't owned a house for at least three years.

The tax credit is part of the economic stimulus package expected to be signed soon by Obama. It was scaled back from a Senate proposal of $15,000 and is limited to first-time buyers who act between the start of this year and the end of November.

The credit of 10 percent of the value of a home, up to $8,000, would cost the government an estimated $6.6 billion. It would start phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000. Buyers would have to repay the credit if they sold their homes within three years.

Struggling homebuilders, already looking ahead to the traditional spring selling season, had been counting on Congress to help spur pent-up sales after completing the worst year for new home sales since 1982.

Executives for one major builder, Beazer Homes USA Inc., noted earlier this week that they had seen an uptick in traffic over the weekend as many prospective buyers learned of the Senate's original incentive provision.

But with that proposal gone, Wall Street analysts said the homebuyer provision will have a negligible effect on homebuilders' fortunes.

"Congress, unambiguously, left the builders out in the cold," said Deutsche Bank analyst Nishu Sood. "It's a pretty big disappointment that they scaled it back."

Real estate agents were more optimistic. The National Association of Realtors projected the change will stimulate an additional 200,000 home sales.

"It'll make a big impact, I think on our market," said Paula Swayne, a real estate broker in Sacramento, Calif., an area flooded with foreclosures and sales of distressed properties. "Buyers will finally have to get off the fence in order to use it ... There are so many affordable houses."

The big unknown, however, was the state of the economy. With employers laying off thousands of workers, many potential homebuyers are nervous about making such a big financial commitment.

Mortgage rates remain low, falling this week to a national average of 5.16 percent for a 30-year fixed-rate mortgage, according to mortgage finance company Freddie Mac.

But credit remains tight. And borrowers need a down payment of at least 3.5 percent to qualify for a loan backed by Federal Housing Administration, a popular option for many first-time buyers.

Many potential buyers haven't saved up enough money for a down payment. "If you don't have a way to get that, the tax credit doesn't do them much good," said James McCanless, an analyst who covers builders for FTN Midwest Securities .

But if the government can prod lenders to loosen credit standards and buy enough mortgage-backed securities to keep mortgage rates low, the tax credit could make a difference, said Mark Zandi, chief economist at Moody's Economy.com.

"I don't think it's enough to jolt the housing market back to life, but it's a plus," he said.

Last year, Congress enacted a $7,500 tax credit for first-time buyers, but that had to be paid back over 15 years and the impact on home sales was negligible.

When the new credit is signed into law, Chris Sipe, a loan officer with Mason Dixon Funding in Rockville, Md., plans to e-mail the more than 1,000 contacts in his database to let them know about the opportunity.

"The bulk of the market right now is first-time buyers," he said.

First-time homebuyers bought 2.2 million new and existing homes last year, according to the National Association of Realtors, making up about 41 percent of total U.S. home sales, up from 39 percent in 2007 and 36 percent in 2006.

Concerns about the bill's overall costs, plus criticism that a much larger credit would not benefit borrowers on the verge or foreclosure, and mainly help people with healthy enough incomes to buy a house, helped sink plans for a much larger credit.

The homebuilding industry mounted an unsuccessful push for a credit for up to $20,000 for all buyers, flying builders in from around the country last month for a massive lobbying push that wound up falling short.

"What the builders wanted was massive relief -- not targeted toward where the real problem was -- paid for by everybody," said Thomas Lawler, a Northern Virginia housing economist. "That seemed to be pretty egregious."

Sales fell in the fourth quarter of last year around the country, except for six states where buyers have been able to snap up foreclosed homes at a bargain: Nevada, California, Arizona, Florida, Minnesota and Virginia, the National Association of Realtors said Thursday. Nationwide, the median sales price was $180,100, down 12 percent from a year ago.