The Obama administration on Friday announced a $14 billion effort to try to stem a rising tide of home foreclosures by giving lenders incentives to erase some mortgage debt and slash mortgage payments for the unemployed.
The new aid programs, funded from the $50 billion allocated to housing rescue under the Treasury Department's Troubled Asset Relief Program, will also allow borrowers to erase mortgage debt down to a maximum of 115 percent of their home's value by refinancing through the Federal Housing Administration.
The plan comes as President Barack Obama is under increasing political pressure to change his strategy for helping struggling homeowners and stem the tide of rising foreclosures and is the second major housing initiative announced in as many months.
Delinquencies on U.S. mortgages rose to nearly 14 percent in late 2009, led by a sharp increase in seriously overdue home loans held by the most credit-worthy borrowers, U.S. banking regulators said earlier on Thursday.
The new measures are a shift from the efforts announced last year, which focused on reducing interest rates for struggling borrowers who got risky loans.
The latest efforts are targeting unemployed workers and homeowners in places where home values have plunged across the board and it is increasingly making more financial sense for homeowners to walk away from their mortgage.
The plan announced in 2009, known as the Home Affordable Modification Program, has more than a million borrowers who have had their payments temporarily reduced but only around 170,000 borrowers who have received permanent modifications.
That ratio has drawn sharp criticism from both Democrats and Republicans on Capitol Hill, as well as a sharp rebuke from the watchdog overseeing the $700 billion bailout.
Ohio Democratic Representative Dennis Kucinich who sided with Obama on this week's landmark healthcare legislation, told the administration official responsible for overseeing the bailout on Thursday he had not seen any bold, new initiatives for underwater borrowers.
What are we doing to help those people who owe more on their homes than the home is worth? Kucinich asked.
The new efforts include at least three and at most six months of temporary assistance for jobless workers and incentives for mortgage servicers to write down part of the principal balance.
Recognizing the difficulties for so-called loan servicers to modify loans for unemployed workers, the administration's plan aims for lenders to cut payments on existing loans to 31 percent of a borrowers income.
The principal reduction plan would be administered under HAMP and is modeled after a principal reduction plan announced this week by Bank of America.
Under pressure from Massachusetts Attorney General Martha Coakley, Bank of America Corp said on Wednesday it would offer what could be up to $3 billion in loan forgiveness to about 45,000 troubled homeowners.
(Additional reporting by David Lawder)
(Editing by Theodore d'Afflisio)