The Obama administration on Thursday tweaked its housing rescue plan
by increasing incentives for mortgage lenders to slash the payments for
homeowners in the worst-hit markets.

The changes announced by the Treasury Department would also
encourage so-called short sales to help troubled homeowners escape from
unaffordable mortgages. In a short sale, the lender retires the
mortgage in return for whatever the homeowner can sell the property for.

This will give (lenders) payments to mitigate some of the risk that
past house price declines might reduce future payments. The way to
think about this is an additional incentive for lenders and servicers
to participate in these programs, U.S. Treasury Secretary Timothy Geithner told a news conference.

The Treasury will use up to $10 billion from a previously announced
$50 billion pool of mortgage modification funds for payments to address
lender concerns that home prices will continue falling in high-cost

These incentives will be calculated on recent declines of local home
prices and average home prices in these markets, the Treasury said, and
may add several thousand dollars to other incentives that servicers can
receive for reducing loan payments.

Under the short sale program, lenders can receive a $1,000 payment
for allowing the owner to sell the house for less than the amount owed
on the mortgage and accepting the proceeds as full repayment. They can
also receive $1,000 for accepting a similar deed-in-lieu transaction,
in which the deed is simply transferred to the lender instead of going
through a costly foreclosure.


Borrowers who agree to short sales or deed-in-lieu deals can
received up to $1,500 in closing costs. Treasury also said it will pay
second lien holders up to $1,000 to relinquish their claims in such

The new incentives are among a number of recent refinements to the
Obama administration's housing rescue programs. A Treasury spokeswoman
said these payments will come from the same $50 billion used to
encourage other types of loan modifications and extinguishment of
second-lien mortgages.

About $15 billion of these funds, from the Treasury's Troubled
Assets Relief Program, have already been allocated to incentives for 14
major loan servicers under the program's initial phase.

The $50 billion, combined with $25 billion in costs absorbed by
Fannie Mae and Freddie Mac, will fund other incentives for lenders to
extinguish second-lien mortgages.

The single most critical step we need to make to stabilize home
prices is to stop the bleeding and prevent what could be up to 10
million foreclosures looming on the horizon, said National Community
Reinvestment Coalition president John Taylor.

He also said more actions from the Obama administration may be needed to stabilize the housing market.


Since the program started in March, the Treasury said more than
55,000 loan modification offers have been extended to borrowers from
servicers, who also have sent about 300,000 solicitation letters to
borrowers who would qualify.

That is far short of the 3 million to 4 million loan modifications
that the Obama administration hopes to achieve in the program.

This is just the beginning. We're at the beginning of progress in these programs, Geithner said.

He also said the new incentives would encourage modifications in
areas suffering from steep price declines and lenders and investors
have been reluctant to modify over fears that a downward price spiral
will push the loan back into default.

If a modification is not possible, we are also announcing steps to
encourage the quick private sale or voluntary transfer of property,
which will save homeowners money and protect their financial future,
Geithner said.

A U.S. Treasury official later told reporters on a conference call
that a separate program that allows Fannie and Freddie refinance
mortgages at up to 105 percent loan to value ratio could be examined in
the future for possible for changes to raise that cap. The official
said such a move was not under active consideration now, but the
Treasury was committed to continue to examine the program for its

In some hard-hit markets such as California and Florida, price
declines have been steep enough that many loans written during the
housing boom exceed 105 percent of the underlying home value, making
them ineligible for refinancing under the program.