WASHINGTON AND LOS ANGELES — The Obama administration, stepping up efforts to stem foreclosures, will offer lenders and homeowners incentives to cut payments on second mortgages, write down balances on first mortgages that are underwater, and repay loans in a timely fashion.
The new measures announced Tuesday would especially help many distressed homeowners who have both first and second mortgages -- and can't afford either. The Treasury Department now wants lenders and their customer-service agents to agree to modify both loans as part of a comprehensive solution.
"Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall," Treasury Secretary Timothy F. Geithner said.
The program would slash second-mortgage interest rates to as low as 1% for five years for some borrowers. It also seeks to revive a Federal Housing Administration effort to persuade lenders to cut loan balances enough so that borrowers again have equity in their homes.
Money for the plan would come from a previously authorized $50-billion allocation from the $700-billion Treasury Department bailout fund that Congress established last year. The $50 billion already has been used to create incentives for modifying first mortgages.
During the real estate boom, many borrowers used second mortgages to cover part or all of their down payment. Amid the housing frenzy, these so-called piggyback loans were granted to people who had poor credit or who weren't required to verify their incomes and assets.
Government officials said about half of all troubled first mortgages have second mortgages attached.
The government plan would provide cash incentives to both loan officers and borrowers for successful second-mortgage modifications. A loan officer would receive $500 upfront, plus $250 a year for up to three years as long as the loan remains current.
Borrowers who make payments on time will receive $250 a year for as many as five years.
The plan also would allow lenders the option of asking the government to buy second loans at pennies on the dollar, eliminating homeowners' obligations. But Treasury officials said they expected rate adjustments to be a much more popular option.
Treasury officials said a number of major banks had indicated that they intended to participate in the program to modify second mortgages. The original loan modification program for primary mortgages was announced in February.
