The Obama administration, effectively conceding that its $75 billion foreclosure prevention program had failed to make a dent, reassigned some of the money Friday as part of an effort to keep 3 million to 4 million people from losing their homes.
Officials announced several new provisions aimed at helping the third of the nation's homeowners who are "under water" -- or those who owe more than their homes are worth. The measures also aim to tackle the refinancing complications caused by the huge number of second mortgages taken in the past two decades and allay the pressure put on homeowners from unemployment.
But the effort was immediately ridiculed as throwing good money after bad.
"It's not adding up. ... For the problems we're seeing out there in the housing market, simply throwing more federal money at it is really not the best solution," said Douglas Holtz-Eakin, former director of the Congressional Budget Office.
With money originally intended for the Wall Street bailout, known formally as the Troubled Asset Relief Program, the new effort offers incentives for mortgage holders to reduce the principals on mortgages that are 15 to 30 percent more than the attached homes are worth. The new loans would get Federal Housing Administration guarantees, which would give the mortgage companies more security.
To qualify, the homeowner must owe less than $730,000 and the home must be the owner's principal residence, not a vacation or investment property. The mortgage must also be consuming more than a third of the owner's monthly income. Reducing the principal instead of the loan interest rate is considered more effective in reducing the monthly payments, but critics say it also further distorts the housing market.
"Washington should stop interfering in the housing market and let prices fall to affordable levels, letting borrowers and lenders alike take their losses," said Nicole Gelinas, a Manhattan Institute scholar.
The Obama administration believes that would further drag down the overall housing market. A year ago in Phoenix, President Obama said that falling home values and tight credit markets are "a crisis which is unraveling homeownership, the middle class and the American dream itself."
Studies indicate that on average, a foreclosed home reduces the value of nearby homes by 9 percent. Allowing the wave of home foreclosures to continue could increase the percentage of homeowners who owe more than their houses are worth.
Other parts of the plan are designed to get banks to reduce second mortgages. A lot of people who got credit that way found they couldn't get help for their principal mortgage because the second would still leave them "under water."
Four of the big second-mortgage companies -- Citigroup, JP Morgan-Chase, Bank of America and Wells Fargo -- have all agreed to modify second mortgages. A third part of the plan would provide three to six months of temporary aid for people who lose their jobs, with the hope that as the economy picks up, fewer people will be out of work for extended periods of time.
The original mortgage foreclosure prevention program only helped a fraction of the 170,000 people who completed the application process -- less than $1 billion of the $75 billion budget was spent.
The new incentives would be paid for by reassigning some of the remaining money.
But Holtz-Eakin, who was also an adviser to Republican Sen. John McCain's presidential campaign, said he's concerned the Federal Housing Administration guarantees could worsen the nation's budget woes if homeowners continue to default and that similar programs dating back to the Bush administration have only distorted the market.
"All they've done is slow the inevitable, which is that we're going to have to get these houses back down to their market prices," he said. "There are going to be losses on the mortgages that banks are simply going to have to write down and all the interventions we've seen have simply slowed that down."