by Luke Mullins

The Obama administration has announced fresh changes to its housing initiative to address two key impediments to a real estate rescue: unemployment and negative equity--or owing more on a mortgage than your home is worth. The changes, which the Treasury Department unveiled Friday, offer temporary relief for borrowers who lose their jobs and provide additional incentives to lenders who reduce the loan balances of borrowers with negative equity.

"These changes will help the administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012," the Treasury Department said in a news release. The government will fund these efforts through the $50 billion of bailout funds earmarked for housing initiatives, and it expects all new efforts to be up and running by the fall.

Here is a look at the key changes:

[See America's Most Underwater Housing Markets.]

1. Assistance for unemployed borrowers:

One of the leading drivers of mortgage delinquency is unemployment; many borrowers who lose their jobs are no longer capable of paying their mortgage bills. Under the revised housing rescue, borrowers who become unemployed would be eligible for three to six months of reduced mortgage payments that total no more than 31 percent of their monthly unemployment benefits while they search for a new job. (Click here for eligibility requirements and additional details.)

2. Principal write-downs:

Borrowers with significant negative equity positions are more likely to fall behind on mortgage payments. This increases foreclosures and exerts additional downward pressure on home prices. The Obama administration is taking several new steps to address the issue. First, it will require servicers to consider writing down an underwater borrowers' mortgage balance when they decide how best to restructure the loan. The government will offer cash incentives tied to the total value of loan principal reduced. At the same time, the Obama administration announced a new program that allows underwater borrowers to refinance into a new loan through the Federal Housing Administration. To participate in the program, lenders must write down at least 10 percent of the original loan balance, and the restructured loan amount must be less than the current value of the home. (Click here for eligibility requirements and additional details.)

The Obama administration launched its initial housing-rescue initiative more than a year ago. The linchpin of the effort was a program designed to reduce monthly payments for millions of struggling mortgage borrowers. But Mark Zandi, the chief economist at Moody's, says there is growing evidence that the government's efforts have been swamped by the scope of the crisis. Financial strain and negative equity have worked to prevent all but about 200,000 borrowers from landing permanent fixes so far, Zandi said in a report. "Without changes to the mitigation plan, only an estimated 500,000 foreclosures will ultimately be avoided," he said. "Based on credit file data from Equifax, close to 4.5 million first mortgage loans are currently in the foreclosure process or at least 90 days delinquent and thus quickly headed toward default."

An October 2009 report by a congressional oversight panel highlighted two key shortcomings of the administration's program. First, the initiative "was not designed to address foreclosures caused by unemployment, which now appears to be a central cause of nonpayment," the panel said. The report also underscored the impact of negative equity on rising foreclosure rates. "It increasingly appears that [the Obama housing rescue] is targeted at the housing crisis as it existed six months ago, rather than as it exists right now," the panel said.

While the changes announced Friday are designed to address these issues head on, their likelihood of success remains unclear. Sylvia Alayon, vice president of operations for the Consumer Mortgage Audit Center, worried that the assistance to unemployed borrowers might prove insufficient. "If you are unemployed, a three-month reprieve is a good start, but when that time has passed, the majority of homeowners will be right back to where they started," Alayon said in a statement. "The administration has to think short-term and long-term at the same time, and right now, temporary relief is putting a band-aid over a broken arm."

Meanwhile, John Taylor, the president and CEO of the National Community Reinvestment Coalition, was skeptical of the principal write-down component. He suggested that because the program is voluntary, many lenders simply won't participate. "The real acceleration in the number of foreclosures prevented will come with mandatory principal [write-downs]," Taylor said in a statement.

For his part, Zandi was cautiously optimistic.

"With these changes to the foreclosure mitigation efforts, it seems plausible to expect that between 1 million and 1.5 million homeowners will be able to avoid losing their homes," he said in a report. "If so, the foreclosure problem will remain serious, but instead of falling later this year, house prices may hold steady. This would be meaningful for homeowners, lenders and the economy." Zandi noted, however, that his analysis was based on a preliminary reading of the program and could change.

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Obama Housing Rescue Tackles Unemployment & Underwater Loans | Luke Mullins