WASHINGTON The Obama administration is trying to jump-start its attempts to tackle the foreclosure crisis with an effort to assist homeowners who owe more on their properties than their homes are worth.
On Tuesday, the Federal Housing Administration began allowing lenders to give these borrowers refinanced loans backed by the government. The lenders will be required to forgive at least 10 percent of the original mortgage amount. Investors who have control over the mortgages as part of their portfolios will select which borrowers are invited to participate.
The plan was first announced in March. Its rollout represents the latest of numerous efforts by the administration to address the housing bust. So far, the government's programs have run into numerous problems.
The lending industry was ill-prepared for a crush of distressed homeowners, the economy worsened and millions of homeowners had taken on too much debt.
Nearly half of the 1.3 million homeowners who have enrolled in the Obama administration's main mortgage-relief program overseen by the Treasury Department have fallen out over the past year.
Many borrowers say the government program is a bureaucratic nightmare, with banks often losing their documents. Banks say borrowers often didn't return required documents.
The new refinancing program takes a different approach. It allows investors in mortgage-backed securities to evaluate their holdings and select borrowers that will be offered refinanced mortgages guaranteed by the FHA.
The theory is that there are some loans that investors simply want to unload because they have a high risk of default.
However, when faced with the choice between slashing the amount borrowers owe on their home loans and foreclosing, lenders generally have chosen to foreclose on borrowers. Many experts doubt the new program will persuade investors to change.
Although the government estimates that 500,000 to 1.5 million homeowners could be helped through the new program, Keefe, Bruyette & Woods Inc. analyst Bose George called that estimate "extremely optimistic."
George said investors are likely to offer refinances only to borrowers who have seen their home values plunge to the point where they owe 40 percent more than their home's value. Those homeowners, he said, are in danger of walking away from their mortgages.
"We're assuming that the impact is minimal," he said.
The program is funded with $14 billion from the Obama administration's existing $75 billion mortgage assistance program.
That money will be used to cover incentive payments to lenders and losses from borrowers who fall back into foreclosure.
To qualify, borrowers must be up to date on their mortgages, though many people who have already received loan modifications through other programs are still eligible. The plan is limited to loans in which homeowners owe at least 15 percent more than their home's current value.
Analysts at Barclays Capital estimated last month that the refinancing program would help 200,000 to 300,000 homeowners. If it reaches that many, it would be a small share of the number of Americans with so-called underwater mortgages.
As of the end of June, about 11 million U.S. homes, or 23 percent of those with a mortgage, were in this position, according to real estate data provider CoreLogic.