U.S. Housing Plan to Fund Interest-Rate Reductions (Update1)

Feb. 12 (Bloomberg) -- The Obama administration’s housing plan will use government money to help reduce interest rates for struggling borrowers, while asking lawmakers to approve more ways to modify mortgages, according to a person briefed on the proposal.

U.S. Treasury Secretary Timothy Geithner intends to make the plan public in coming days, possibly within a week, said the person, who declined to be identified before the announcement. Some elements can begin immediately, and others must be considered by Congress.

Foreclosure filings in the U.S. surged 81 percent last year to 2.3 million, the highest on record, as home prices fell and tighter mortgage standards made it harder for homeowners to sell or refinance, according to RealtyTrac Inc. of Irvine, California, a provider of real estate data. The administration has pledged to use $50 billion to $100 billion for housing relief, taken from the $700 billion bank rescue package enacted last year.

“Our focus will begin on using the full resources of the government to help bring down mortgage payments and help reduce mortgage interest rates,” Geithner told the Senate Banking Committee yesterday.

Stocks Slide

Homebuilders’ stocks dived today after lawmakers negotiating a compromise fiscal stimulus package slashed a $35 billion plan designed to increase home sales. While a Senate bill called for doubling a $7,500 tax credit for homebuyers, the agreement on a $789 billion stimulus included only a $500 boost.

The Standard and Poor’s Supercomposite Homebuilding Index slid 2.6 percent to 195.91 today. Centex Corp., which supported the Senate measure and is the second-biggest U.S. homebuilder by sales, dropped 7.3 percent to $8.89.

The government will subsidize interest-rate reductions by working with the servicers that handle mortgages, the person said. That way, servicers can lower monthly payments for households without shortchanging investors.

The new plan, which isn’t final and could change, would be voluntary for lenders and investors, the person said. It is aimed at loan modifications that have a positive net present value, meaning that the cost of a foreclosure would be higher than that of adjusting the loan terms.

Courting Banks, Industry

Geithner and Housing Secretary Shaun Donovan courted banks and housing industry groups yesterday in an effort to gather support ahead of the housing policy announcement. The Cabinet officers used the hour-long meeting to discuss strategies for preventing foreclosures and modifying mortgages for struggling homeowners.

Like earlier efforts from the Federal Deposit Insurance Corp. and housing industry groups, the new plan will make use of interest-rate reductions, loan extensions and so-called principal forbearance, in which part of a mortgage’s principal is deferred to the end of the loan’s term.

All these measures will be used to help homeowners reach an affordable monthly payment, the person said. That monthly housing payment, compared with their income, will be the focus of the program, rather than achieving a target interest rate.

Borrowers won’t need to be in foreclosure proceedings to take advantage of the program, the person said. The new program also will create a common standard for loan modifications, to replace the range of standards used in currently available programs.

Bankruptcy Provision

The new loan modification program will be combined with a push for more authority from Congress, the person said. The Obama administration wants to allow judges to change loan terms under some conditions, and it also wants to permit modifications on Federal Housing Administration and Veterans Administration loans, which currently can’t be changed.

Community groups want to give judges the power to lower mortgage rates for borrowers in bankruptcy, a provision that the banking industry opposes. Investors have said this provision could cripple the secondary mortgage market and raise interest rates for all borrowers.

President Barack Obama said on Feb. 10 that this proposal, commonly called “cramdown” authority, will not be part of the administration’s initial housing program. Obama said cramdowns are “one potential provision that has been discussed, that I’m supportive of, but is not in this package. It will be in a separate package.”

JPMorgan, Citigroup

Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. were represented at the meeting yesterday with Geithner and Donovan, along with Fannie Mae and Freddie Mac, the government-backed mortgage companies, and a number of banking industry and consumer advocacy groups, the people said. The attendees weighed in on how to help homeowners survive the recession and its accompanying credit crunch.

Geithner said the administration has a plan “that is not by any means set in stone,” according to John Taylor of the National Community Reinvestment Coalition.

“The proposal wasn’t finished and they are open to ideas,” Taylor said.

Before convening the housing meeting, Geithner told the Senate Banking Committee that the government seeks to reduce the cost of borrowing and paying off home loans.

Lawmakers indicate they are eager to see the details of the administration’s housing plan. Senate Banking Committee Chairman Christopher Dodd told reporters that using $50 billion to $100 billion of the $700 billion bank rescue fund to stem foreclosures will create “a tourniquet” for the housing crisis and help families stay in their homes.

To contact the reporters on this story: Margaret Chadbourn in Washington at mchadbourn@bloomberg.net; Rebecca Christie in Washington at Rchristie4@bloomberg.net.

To contact the editor responsible for this story: Larry Liebert at lliebert@bloomberg.net