Government May Subsidize Mortgage Modifications

President Barack Obama’s administration is reportedly in talks to finalize a mortgage subsidy program geared toward at-risk borrowers not yet delinquent on their loans. Unnamed sources on Thursday told Reuters the plan involves a reappraisal of homes for value and affordability, as part of an examination of homeowners to determine eligibility for the subsidy program. Sources also told Reuters that homeowners would not need to prove hardship to qualify for the program, which would subsidize lenders that lower monthly payments. In addition to the segment of not-yet-delinquent borrowers the plan targets, another distinguishing feature of the subsidy program would be its lowered mortgage payment-to-income ratio from the level that currently defines other workout programs like the one employed by the Federal Deposit Insurance Corp. at failed IndyMac Federal Bank. Most modification and workout strategies currently target a 38 percent debt-to-income ratio, meaning homeowners with mortgage payments of more than 38 percent of their gross monthly income are eligible for participation. (Sources told the New York Times the new ratio would likely be 31 percent.) Government-sponsored agencies Fannie Mae (FNM) and Freddie Mac (FRE) may have a role to play in administering the program, although details are unclear — and may not necessarily involve the much-anticipated push for the 4 or 4.5 percent government-sponsored mortgage interest rate — according to the Reuters article. The subsidy program might be introduced as part of the $50 billion plan to address homeowners that has been discussed as a new TARP initiative, a foreclosure reduction program that sources told the Washington Post may be announced as early as next week. The Post‘s sources also said a provision within the plan may endorse the so-called “cram-down” legislation that would allow bankruptcy judges to alter mortgage terms. The program would come in excess of the $789 billion financial stimulus package, which passed a Senate vote earlier this week and is expected to pass a final Congressional vote as early as today — and as late as this weekend — in time to reach the President’s desk by the preliminary Feb. 16 target date. Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.