The US Treasury on Wednesday unveiled the details of Barack Obama’s housing ­rescue plan, which will pay mortgage servicers to modify troubled home loans while reducing borrowers’ interest rates to as low as 2 per cent.

In an effort to ensure that a relaxation of mortgage terms is only given to borrowers who need them, those hoping to qualify for changes will have to fully document their income and sign an affidavit declaring financial hardship.

Servicers, which collect home loan payments and work with troubled borrowers, will have to conduct detailed assessments of a borrower’s ability to pay and adhere to strict reporting requirements in order to collect incentive payments from the Treasury. Fannie Mae and Freddie Mac, the government-run mortgage financiers, will administer the programme to ensure that servicers only receive payments for successful mortgage modifications.

Lenders and servicers ­welcomed the plan on Wednesday as providing the first comprehensive scheme for easing the crisis, which they say has worsened in part because struggling homeowners have held out for the latest government bail-out.

Reacting to the plan, a senior mortgage industry official said: “The absence of standardisation has made modifications very complicated. The existence of a standard plan is a major step forward for the industry.”

The plan, released in broad-brush terms two weeks ago, has three components. The first two parts involve an expansion of the role of Fannie and Freddie – providing them with additional access to funds and pursuing a $200bn refinancing plan for borrowers with mortgages that exceed the value of their homes.

The third component provides for $75bn of subsidies for modifications to home loans owned by banks and investors. This will provide mortgage servicers with incentive payments to modify loans and borrowers with inducements to stay up to date on their payments.

The nuts and bolts of the plan included additional incentives to mortgage servicers. These include incentives to push borrowers toward alternatives to foreclosure if they do not qualify for a modification. This could include a short sale of the house, for example, where the borrower sells a house worth less than the mortgage to clear the debt, instead of going through expensive foreclosure proceedings.

Also added to the details was an option for servicers to reduce borrowers’ total outstanding mortgage debt, instead of pursuing a reduction in interest rates.

When the plan was first released it revolved almost entirely around bringing down monthly payments, primarily through reducing the interest rate on home loans. But studies by some regulators have shown that negative equity may be one of the principal factors behind foreclosure.


Source FT.com