Administration proposes that banks spend $20 billion to help strapped borrowers

Congressional Republicans are moving to shut down President Obama’s $30 billion program to help struggling homeowners pay their mortgages, but the White House appears to have already found a substitute plan.

The administration has proposed requiring the nation’s largest banks to spend $20 billion modifying loans of delinquent borrowers to make them more affordable as part of a deal settling charges that the banks botched the paperwork on thousands of foreclosures.

If the plan succeeds, the president would attain a key goal sought by community groups and Democratic grass-root constituencies whose support will be critical for his re-election without having to spend further federal dollars on the program.

But House Republicans are also seeking to make good on campaign promises to unwind the unpopular housing bailout programs set up in the wake of the 2008 financial crisis.

On Tuesday, they will unveil bills to try to phase out government assistance to mortgage giants Fannie Mae and Freddie Mac and are moving on plans to scrap the $30 billion program Mr. Obama set up in 2009 to help homeowners who are underwater or behind on their mortgages.

Legislators are motivated not only by their drive to eliminate what they view as unnecessary spending but to kill what remains of the bank bailout program or TARP targeted by tea party groups, which is the source of funding for the homeowner assistance program.

Some conservative Republicans are concerned that the program sets a bad precedent by helping a minority of deadbeat borrowers who have stopped paying their mortgages even as the majority of homeowners struggle to keep making payments despite financial strains.

Legislators say such debt-forgiveness programs can create a kind of “moral hazard” that could encourage more of the one in four homeowners who are underwater to stop paying their mortgages in hopes of receiving federal help and forgiveness.

“Congress should move swiftly to end the presidents disastrous mortgage program,” said Sen. Jim DeMint, South Carolina Republican and co-sponsor of a bill to end the administration’s Home Affordable Modification Program (HAMP).

But even as Congress moves to cut off funding for the program, the White House has teamed up with the state attorneys general in offering a proposed settlement regarding charges of foreclosure irregularities that would essentially require banks to step in and pay for the homeowners’ aid.

The 27-page draft settlement would require the nation’s four largest banks to set aside $20 billion to $30 billion to reduce the principal on mortgages that are underwater so homeowners can avoid foreclosure and stay in their homes.

Analysts say the proposal appears to be a kind of substitute for the HAMP program, which nearly all sides agree has failed in its goal of stemming the tide of foreclosures across the nation. That was the conclusion of David Hendler, a housing analyst at CreditSights.

“With the 2012 presidential election just around the corner,” he said, the White House wants to “provide mortgage relief to everyday troubled borrowers as a cornerstone of the upcoming campaign.”

Democratic groups view the big banks as the “deep pockets” they need to provide mortgage relief to strapped borrowers, even though those banks did not originate all the souring mortgages that homeowners want to modify, he said.

The “big four” banks - Bank of America, JPMorgan Chase & Co., Wells Fargo and Citigroup - “continue to attract attention and remain a populist punching bag” that Democrats think they can use readily to extract further concessions, he said.

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