Mortgage companies are finally starting to sign up for a long-delayed piece of the Obama administration's $75 billion foreclosure-prevention program.
The administration had been offering lenders who made so-called "piggyback" mortgages — second loans that allowed consumers to make a little or no down payment — incentives to lower payments or eliminate the loans entirely.
But no one signed up until Tuesday when Bank of America became the first to do so.
During the housing boom, lenders readily gave such second loans. While home prices soared, such mortgages were even extended to borrowers with poor credit and people who didn't provide proof of their incomes or assets.
Those loans are now an obstacle to alleviating the housing crisis. That's because piggyback lenders — fearing they won't be repaid — can veto a borrower's efforts to modify their primary mortgage.
Consumer advocates and even some on Wall Street have been calling on the government to help the roughly one in three homeowners who owe more on their mortgages than their homes are now worth.
The administration has been studying ways to encourage investors to cut borrowers' mortgage balances. Many want to do so but say they have been blocked by investors in second loans. The Obama administration is hopeful that the piggyback program could help, said Bill Apgar, a senior adviser at the Department of Housing and Urban Development.
"We're still a couple of weeks away," from getting more lenders to participate, Apgar said Tuesday. "This is not an easy problem to solve."
If more lenders follow Bank of America it could clear the way for more mortgage companies to cut borrowers' principal balances on their primary loans. But administration officials appear wary of subsidizing such reductions with taxpayer money.
That could spark a backlash from critics who claim it's unfair to people who are still paying their mortgages on time and a bailout for banks that made reckless loans.
With foreclosures still at record-high levels, The Obama administration's program to aid homeowners has been a disappointment. Only about 66,500 borrowers, or 7 percent of those who signed up, had completed the program as of December.
The Treasury Department plans later this week to announce a streamlined process designed to get more borrowers to complete the loan modification program. The program reduces mortgage rates to as low as 2 percent for five years.
But many experts say more dramatic changes are needed.
"Unless you modify principal, there is absolutely no hope of restructuring mortgages on a mass scale to keep people in their homes," Daniel Alpert, managing director of the New York investment bank Westwood Capital LLC said earlier this month. "Eventually their hand will be forced."
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