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Obama Revamps Home Loan Aid Program

WASHINGTON ( TheStreet) -- The Obama administration is taking steps to modify its mortgage-assistance program, following the lead of banks who have taken matters into their own hands.

On Friday, the government said it would adjust the Home Affordable Modification Program and other federal programs to reduce principal, issue new loans to underwater borrowers who were previously excluded, and offer assistance to unemployed homeowners, to allow them to keep paying their bills. The Treasury Department will fund its renewed effort using $14 billion from its $75 billion foreclosure-prevention fund, which has been panned as largely ineffective, and stalled for over a year.

The administration's moves follow the lead of big mortgage lenders like Bank of America (BAC - Get Report), Wells Fargo (WFC - Get Report) and JPMorgan Chase (JPM - Get Report), which have been helping more borrowers outside the confines of HAMP than within it.


On Wednesday, Bank of America announced perhaps the largest private effort to restructure troubled mortgage debt , much of which came from its Countrywide acquisition. Wells Fargo and JPMorgan Chase have taken extra steps with their borrowers in separate programs. Much of the lenders' problems have come from their acquisitions of Countrywide, Wachovia and Washington Mutual, which all succumbed to the weight of troubled subprime loans. However, as the mortgage crisis continues, problems have bled into even prime loans made from the lenders' own legacy divisions.

The administration was defensive on Friday, just days after a watchdog harshly criticized HAMP's progress. Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, said Obama's team was using a "meaningless" standard to measure performance -- of offers extended, rather than borrowers helped.

Indeed, HAMP's progress has been slow and unsteady , and the measures adopted on Friday were suggested by advocates at the start . Initially, big banks had issues processing the huge wave of borrower applications, since more than a year of layoffs had depleted their staffing. Once the ball got rolling, and borrowers were extended offers, there were other issues -- inadequate or improper paperwork, communication errors and borrowers who ended up not being qualified after all. Banks were also haunted by claims that they simply didn't want to participate.

The administration eased its paperwork standards, and applied pressure to the industry by releasing monthly results and openly criticizing banks' performance. It also pushed banks to start modifying second liens as well. Bank of America was the first to enroll in that modification effort, with JPMorgan and Citigroup (C) doing the same this week,

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