WASHINGTON — The same mortgage lenders that candidate Barack Obama accused last year of causing the housing mess would get a windfall from President Obama's government under his foreclosure rescue program.
The $75 billion plan announced Wednesday has the potential to be far more effective than past federal efforts to help struggling homeowners lower their mortgage payments and stay in their homes. But for that to happen, investors in complex mortgage securities have to agree to participate — something the government has so far failed miserably to persuade them to do.
That's where the goodies for the much-maligned industry come in.
Companies would get $1,000 for agreeing to give a strapped homeowner a lower monthly payment instead of foreclosing — more if the borrower hasn't yet fallen behind on what they owe. They can get up to another $3,000 over the next three years. And they get government insurance to cover part of the money they might lose if the homeowner ultimately defaults on the house anyway.
Last October in Reno, Nev., Obama vowed, "I won't let banks and lenders off the hook when it was their greed and irresponsibility that got us into this mess." But the outlines of his plan were an acknowledgment that he will need cooperation from firms that collect mortgage payments — known as loan servicers — if he intends to reach his goal of preventing up to 9 million foreclosures.
"The truth is that at the end of the day, loan modification remains voluntary, so the servicers need to see it as sufficient incentive to participate," said Andrew Jakabovics of the Center for American Progress, who has worked with Obama's team on housing issues.
Still, Jakabovics called some of the payments an "unnecessary windfall" that is "overly generous" — particularly since avoiding a costly foreclosure is a financial imperative for mortgage servicers anyway.
"You still have the very serious question of what kind of incentives you're providing for what's essentially bad behavior," said David C. John, an analyst at the conservative Heritage Foundation.
Even tough mortgage industry critics concede, however, that such enticements are necessary to get companies to step up and help homeowners, given the legal and financial challenges that modifying home loans can pose.
"It's just what needs to happen, wherever the blame lies" for the housing mess, said Debbie Goldstein, the executive vice president of the Center for Responsible Lending, a consumer group.
The plan also abandons an aspect of the Democratic-written foreclosure rescue program enacted last year that proved anathema to mortgage holders: requiring that they take a loss up front before the government would help renegotiate a loan. The program failed miserably, helping fewer than 40 homeowners compared to the 400,000 promised.
Under Obama's new plan, mortgage holders only have to take a hit on the interest payments they receive each month, and would in most cases be made whole by the government for the value of their loans.
"It's a veritable garden full of carrots," said Howard Glaser, a mortgage industry consultant who served in the Clinton administration.
A key element would loosen lending rules at government home loan giants Fannie Mae and Freddie Mac to let as many as 5 million homeowners who owe more than their homes are worth refinance to bring down their monthly payments. But that's little comfort to many borrowers in places like Arizona, California, Nevada and Florida — they owe far too much to qualify.
The plan "seems to offer little help to borrowers whose loan exceeds their property value by more than 5 percent," John Courson, chief executive of the Mortgage Bankers Association, said in a statement.
The plan beefs up the role of Fannie and Freddie, which were seized by federal regulators last year, allowing them to hold an additional $50 billion each in mortgage investments.
The plan isn't all about sweeteners for mortgage holders. Obama's plan also requires that any financial institution benefiting from the $700 billion Wall Street bailout develop plans to help homeowners avoid foreclosures. Those rules apply to the largest banks, which are also the largest holders of home loans.
Yet some doubt that even those new rules will prod financial players that have so far been unwilling to help homeowners to do so now.
"It maintains a voluntary system of compliance," said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group. "The investors and banks have shown great hesitancy in voluntarily participating in these mortgage programs."
Many Democrats and housing analysts believe that the only true way to force mortgage holders to help strapped borrowers is to give judges power to modify bankrupt homeowners' loans, cutting the total they owe and their monthly payments. Obama is backing that move as part of his housing plan, although it will be up to Congress to work out the details.
Meanwhile, housing specialists say the mortgage industry will be slow to act on the new incentives Obama has laid out for helping homeowners — if they end up working.
"It's going to be a long, slow process because these mortgages have to be redone one by one," the Heritage Foundation's John said. "You can't just snap your fingers and solve this one."