A key lawmaker is working with banks, regulators and the Obama administration on a new way to boost the government's struggling foreclosure prevention effort by encouraging banks to reduce the total amount borrowers owe.
Rep. Barney Frank, D.-Mass, said Friday he is in talks with several major lenders in an effort to remove a key obstacle: lenders who hold second mortgages. During the housing boom, business boomed for so-called "piggyback" mortgages — second loans that allowed consumers to make a little or no down payment.
Those loans, in many cases, are now worthless, but banks are reluctant to release their claims or reduce the value of those loans on their books. Those lenders can block some mortgage modifications.
"Many investors have told us that they're ready to get something instead of nothing," Frank said.
One way to attack the problem, Frank said, is an approach in which investors in second mortgages would be promised a payoff if home values recover and the home is eventually sold.
The Obama administration last year developed a piece of its $75 billion foreclosure-prevention program to tackle this problem, but it has barely gotten going. Only one lender, Bank of America, has signed up so far.
"Some of the banks, we fear, are just sitting there hoping that the market recovers and they get back in the money," said Michael Calhoun, president of the Durham N.C.-based Center for Responsible Lending. That, he said, is "jamming up the whole system."
Lawmakers and officials are talking about changes to the Obama administration's $75 billion foreclosure prevention program because it has been a disappointment so far.
So far, only 116,300 borrowers out 1 million enrolled have had the terms of their mortgages changed permanently. Experts warn that hundreds of thousands of borrowers will not be eligible or will not complete the process.
© Copyright 2015 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.