President Obama’s plan to reduce the flood of home foreclosures will include a mix of government inducements and new pressure on lenders to reduce monthly payments for borrowers at risk of losing their houses, according to people knowledgeable about the administration’s thinking.
The plan, to be announced Wednesday, is expected to include government subsidies for reducing a borrower’s interest rate, which a lender would have to match with its own money.
But officials cautioned that subsidies for lower interest rates would not in themselves help many troubled homeowners, because lenders were still likely to view many of those borrowers as bad risks and refuse to restructure their loans. As a result, they have been casting about for sticks as well as carrots to persuade the lenders to take part.
Exactly what kind of pressure Mr. Obama would bring to bear remains unclear. One possibility is a stepped-up effort to enact legislation that would give bankruptcy judges new power to restructure mortgages and reduce a borrower’s payments.
That change, sometimes described as a mortgage “cram-down,” would greatly increase the bargaining power of borrowers in negotiating new loan terms with their lenders. The banking industry has vehemently opposed it, warning that investors will stop financing mortgages if they know that a judge can unilaterally change the terms at a later date.
But Mr. Obama and Democratic leaders in Congress support the change, and Democratic lawmakers had already been planning to attach such a measure to a catch-all spending bill that Congress will soon have to pass to keep the government running.
Administration officials refused to say on Monday exactly what carrots and sticks they intended to invoke as part of their plan. But Mr. Obama’s top advisers are keenly aware that a long series of voluntary loan-modification programs, championed by the Bush administration, made no dent in the flood of foreclosures that began in 2007.
By the end of 2008, slightly more than 9 percent of all mortgages in the United States were either delinquent or in foreclosure, according to the Mortgage Bankers Association. The number of loans in foreclosure hit a new record of 2.3 million last year, more than double the volume in 2006, and industry analysts estimate that it will hit at least 3 million in 2009 in the absence of a government rescue.
The plan to subsidize lower interest rates for distressed homeowners would involve the government and the lender each contributing matching amounts to reduce a person’s monthly payment, possibly by several hundred dollars a month.
Supporters contend that the measure will be comparatively simple to execute and less expensive than many other options that have been considered. Mr. Obama’s top advisers have vowed to spend at least $50 billion to help homeowners keep their houses, and they already have the authority to tap the remaining $350 billion in the Treasury Department’s financial industry bailout fund.
“I think it is going to have far more effect on the mortgage servicers and the bondholders than previous proposals,” said Senator Charles E. Schumer, Democrat of New York. “It’s going to have both carrots and sticks.”
One of the biggest headaches in modifying mortgages has been the fact that most loans were bundled into pools, which were then resold as mortgage-backed securities. Mortgage servicers, third-party companies, collect the monthly payments and take action against delinquent borrowers. These companies remain nervous that bondholders will sue them if they make overly generous concessions.
While stumping for his economic stimulus plan last week in Elkhart, Ind., Mr. Obama renewed his call for legislation that would authorize bankruptcy judges to reduce mortgage payments and said he hoped to make the idea “part of our housing package.”
“It turns out you can’t modify that mortgage if you’re in bankruptcy,” the president told residents. “Now that makes no sense. What that’s doing is, it’s forcing a lot of people into foreclosure who potentially would be better off, and the bank would be better off and the community would be better off, if they’re at least making some payments.”
White House officials are likely to release a comprehensive plan on home foreclosures, determined to avoid a repeat of the drubbing that the Treasury secretary, Timothy F. Geithner, received last week when he released only the outlines of a plan to rescue the nation’s banks, leaving the most important elements to be decided later.
On Wednesday, Mr. Obama will go to Phoenix to outline the plan for rescuing homeowners. He is expected to supply concrete details as well as a timetable for getting the plan off the ground.
But Mr. Obama will be running the risk of angering vast numbers of homeowners, both those at risk of losing their homes and the tens of millions more who are current on their payments and bitterly resent the government bailing out those who borrowed more than they could afford.
“This puts the whole moral-hazard issue front and center,” said Howard Glaser, a former Clinton administration official and now a financial consultant.
“This is the equivalent of having the government write a check to both the borrowers and the banks, who both made bad decisions,” he said. “But if you are going to do something, regardless of the mechanism, you are going to have to cross the Rubicon to direct federal assistance. It’s a sign of how very few options are left.”
For all the political hazards of bailing out people who made bad decisions, many economists say the government needs to attack foreclosures if it wants to turn around the economy.