US Congress watchdog faults Obama mortgage plan

In a report that highlights the soaring U.S. home foreclosure rate, the panel said the rescue plan also falls short in dealing with second mortgages and on empowering bankruptcy judges to help struggling homeowners.

The report was issued by the Congressional Oversight Panel of the $700-billion Troubled Asset Relief Program (TARP), a bailout fund formed last year by the Bush administration to address the worst U.S. financial crisis in generations.

The Obama administration inherited the TARP and is retooling it to focus more on helping homeowners, in addition to propping up banks and other companies. The oversight panel is under orders to evaluate how TARP programs perform.

Its report praised estimates that Obama's housing plan could aid up to five million homeowners with expanded Fannie Mae and Freddie Mac refinancing. But it noted, "The panel has additional areas of concern that are not addressed."

One is that the plan lacks legal protections for mortgage servicing companies that face litigation risk if they try to help struggling borrowers by redrawing their mortgage terms.

Servicers collect monthly payments on home loans, pool them and send the money to investors in mortgage-backed securities. Servicers have to abide by "pooling and servicing agreements" with the investors that can strictly limit modification of mortgages since that can cut into the investors' profits.

Those agreements have been a key obstacle to the government's efforts to get servicers to modify more mortgages by, for instance, reducing the principal or interest rate.

The Obama plan lacks a coherent approach to this issue, said the oversight panel.

The U.S. House of Representatives on Thursday approved a bill that contains a provision to give mortgage service firms legal "safe harbor" if they try to revise distressed loans.

The Senate is expected to consider its own version of the House bill soon, but chances of passage are uncertain there.

About one in eight U.S. homeowners with mortgages, a record share, ended 2008 behind on payments or are in the foreclosure process, a mortgage industry group reported on Thursday. (Reporting by Kevin Drawbaugh; Editing by Diane Craft)