Government to Deploy Broader Mortgage Aid

The Obama administration is making great efforts in reducing mortgage balances for homeowners who owe more than the value of their houses. About 500,000 and 1.5 million underwater loans could be modified through the program. Those who are still on mortgage payments but have no equity in their homes will be put on priority.

In this program, banks and other creditors that write down mortgages to less than the value of the property can essentially hand off the reduced loan to the government. The process involves refinancing borrowers into loans backed by the Federal Housing Administration.

While the program puts taxpayers at risk—officials estimate one in five loans in the program could default—the government has set aside $14 billion previously earmarked for housing aid from the Troubled Asset Relief Program to cover losses.

However, half of the 1.3 million borrowers that enrolled in temporary loan modifications have fallen out of HAMP because they didn't qualify. Only one-third has received permanent modifications.One of the biggest dangers facing the housing market is the glut of underwater homeowners who could default if their personal finances or home prices worsen.

But not every homeowner who is underwater can participate. The bank or investors that own the loan must be willing to write down its value. For more than a year, many of those investors, which include hedge funds and pension funds, have been clamoring for such a program because they have already had to mark down the value of their holdings.

But that could be hard to do because mortgage servicers, which handle loan payments and decide which loans should be modified, are overwhelmed. And some borrowers might be discouraged from taking part because receiving a principal reduction will show up on their credit score.

Moreover, investors may not be able to participate as hoped because certain contracts that govern mortgage securitizations say modifications can only proceed if there is an "imminent" risk that the borrower would default.