Obama foreclosures plan includes federal subsidies

By the end of 2008, slightly more than 9 percent of all US mortgages were either delinquent or in foreclosure. (David J. Phillip/Associated Press/File 2009)

WASHINGTON - President Obama's plan to reduce the flood of home foreclosures will include a mix of government inducements and new pressure on lenders to reduce monthly payments for borrowers at risk of losing their houses, according to people familiar with the administration's thinking.

The plan, to be revealed tomorrow, is expected to include government subsidies for reducing a borrower's interest rate, which a lender would have to match with its own money. But administration officials also plan to put heat on lenders that do not move aggressively enough.

Exactly what kind of pressure Obama would bring to bear remains unclear. One possibility is a stepped-up effort to have Congress pass legislation that would give bankruptcy judges new power to restructure mortgages and reduce borrowers' payments.

That change, sometimes described as a mortgage "cram-down," would greatly increase the bargaining power of borrowers in negotiating new loan terms with their lenders. The banking industry has opposed it, warning that investors would stop financing mortgages if they knew that a judge could unilaterally change the terms later.

But Obama and Democratic leaders in Congress support the change, and Democratic lawmakers had already been planning to attach such a measure to a catch-all spending bill that Congress will soon have to pass to keep the government running.

Administration officials declined to say yesterday exactly what carrots and sticks they intend to invoke as part of their plan. But Obama's top advisers are keenly aware that a long series of voluntary loan-modification programs, championed by the Bush administration, made no dent in the flood of foreclosures that began in 2007.

By the end of 2008, slightly more than 9 percent of all mortgages in the United States were either delinquent or in foreclosure, according to the Mortgage Bankers Association.

The plan to subsidize lower interest rates for distressed homeowners would involve the government and the lender each contributing matching amounts to reduce a monthly payment, possibly by hundreds of dollars.

Supporters contend the measure would be comparatively simple to execute and less expensive than many other options that have been considered. Obama's top advisers have vowed to spend at least $50 billion on helping homeowners keep their houses, and they already have the authority to tap the remaining $350 billion in the Treasury's financial industry bailout fund.

But officials cautioned that subsidies for lower interest rates would not in themselves help many of the most troubled homeowners, because lenders were still likely to view many of those borrowers as bad risks and refuse to restructure their loans.

One of the biggest headaches in modifying mortgages has been that most loans have been bundled into pools, which were then resold as mortgage-backed securities. The "mortgage servicers" are third-party companies that collect the monthly payments and take action against delinquent borrowers. These companies remain nervous that bondholders will sue them for making overly generous concessions.