Gov't To Unveil Plan To Shrink Home Loans - Plan To Be Unveiled Friday

The Obama administration will announce Friday a plan to reduce the amount some troubled borrowers owe on their home loans, after months of criticism that it hasn't done enough to prevent foreclosures.

The plan will let people who owe more on their mortgages than their properties are worth get new loans backed by the Federal Housing Administration, people briefed on the plan said. It would be funded by $14 billion from the administration's existing $75 billion foreclosure-prevention program.

The people briefed on the plan declined to be identified because the program had not yet been announced. The plan also will require the more than 100 mortgage companies participating in the administration's program to consider slashing the amount borrowers owe. They will get incentive payments if they do so. The plan also is expected to include at least three months of temporary aid for borrowers who have lost their jobs.

The changes "will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own," an administration official said.

To date, the administration's $75 billion foreclosure-prevention program, has been a disappointment. Critics have complained the program does little to encourage banks to cut borrowers' principal balances on their primary loans. Nearly one in every three homeowners with a mortgage are "under water" -- they owe more than their property is worth -- according to Moody's Economy.com.

Earlier in the day, Herbert Allison, an assistant Treasury secretary, cautioned that any new plan is "not going to mean that all underwater mortgages are suddenly in the program." Obama administration officials have been studying such issues for months. An expansion of its foreclosure-prevention program has long been expected because only 170,000 homeowners have completed the process out of 1.1 million who began it over the past year. And lawmakers have been frustrated by the lack of results. "It has failed," said Rep. Jackie Speier, D-Calif., at hearing of the House oversight committee on Thursday. "It has failed miserably and unfortunately we are incapable of saying: OK, this was an experiment, it didn't work, let's try something else."

The program is designed to lower borrowers' monthly payments by reducing mortgage rates to as low as 2 percent for five years and extending loan terms up to 40 years. To complete the program, homeowners need to go through a three month trial period and provide proof of their income, plus a letter documenting their financial hardship. Though $75 billion in funding is available to the more than 100 lenders who have signed up, only a tiny fraction has been spent. Lenders had received $58 million in incentive payments as of last month, according to the Government Accountability Office.

The Wall Street Journal; GAO; FHA; Moody's Economy.com.