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White House Working on Foreclosure Relief Plan

AP Real Estate Writer

WASHINGTON (AP) — President Barack Obama's administration is considering spending taxpayer dollars to cut monthly payments for homeowners on the verge of foreclosure, according to two people briefed on the proposals.

The deliberations came as lawmakers prepared to enact a new tax credit of up to $8,000 for first-time homebuyers that is intended to boost the ailing housing market.

A Reuters report that the U.S. planned to subsidize troubled homeowners' mortgage payments helped the Dow Jones industrial average pare sharp losses Thursday afternoon and finish down less than 7 points, at 7,932.76. Earlier Thursday, it had fallen more than 245 points. The Federal Housing Finance Agency declined to comment on the report.

Details of the plan were not final but were expected to be unveiled in the coming weeks, according to the people who declined to be identified because the details were not yet complete. The effort would be part of a plan to spend $50 billion on foreclosure prevention and establish U.S. standards for modifying home loans.

The Obama administration has several ways it could spend money to stem foreclosures.

It could follow a proposal by Sheila Bair, chairman of the Federal Deposit Insurance Corp., who wants to give banks an incentive to reduce borrowers' payments by having the government absorb some of the losses should loans fail again.

Or, the government could direct federal dollars to loan modifications. If a lender, for example, agreed to reduce a borrower's rate, the government could subsidize a further interest rate drop.

Still, deciding who would qualify would be a challenge, especially as foreclosures continue to soar. More than 274,000 U.S. households received at least one foreclosure-related notice last month, according to RealtyTrac Inc.

The Obama administration also is expected to back a push in Congress — opposed by the mortgage industry — to let bankruptcy judges alter the terms of primary home loans. Earlier this week, Obama said it "makes no sense" that judges are not allowed to do so.

Meanwhile, the new tax credit for first-time homebuyers that is included in the economic stimulus package was far less than the homebuilding industry wanted. Analysts expect the credit to provide only a modest boost to the battered U.S. housing market. (Read more on the tax credit.)

First-time buyers are defined as those who haven't owned a house for at least three years.

The tax credit of 10 percent of the value of a home, up to $8,000, would cost the government an estimated $6.6 billion. It would start phasing out for couples with incomes above $150,000 and single taxpayers with incomes above $75,000. Buyers would have to repay the credit if they sold their homes within three years.

Wall Street analysts said the homebuyer provision will have a negligible effect on homebuilders' fortunes.

"Congress, unambiguously, left the builders out in the cold," said Deutsche Bank analyst Nishu Sood. "It's a pretty big disappointment that they scaled it back."

Real estate agents were more optimistic. The National Association of Realtors projected the change will stimulate an additional 200,000 home sales.

The big unknown, however, was the state of the U.S. economy. With employers laying off thousands of workers, many potential homebuyers are nervous about making such a big financial commitment.

Mortgage rates remain low, falling this week to a national average of 5.16 percent for a 30-year fixed-rate mortgage, according to mortgage finance company Freddie Mac.

But credit remains tight. And borrowers need a down payment of at least 3.5 percent to qualify for a loan backed by Federal Housing Administration, a popular option for many first-time buyers.

Many potential buyers haven't saved up enough money for a down payment. "If you don't have a way to get that, the tax credit doesn't do them much good," said James McCanless, an analyst who covers builders for FTN Midwest Securities .

But if the government can prod lenders to loosen credit standards and buy enough mortgage-backed securities to keep mortgage rates low, the tax credit could make a difference, said Mark Zandi, chief economist at Moody's

"I don't think it's enough to jolt the housing market back to life, but it's a plus," he said.

Last year, Congress enacted a $7,500 tax credit for first-time buyers, but that had to be paid back over 15 years and the impact on home sales was negligible.


AP Business Writer Christopher S. Rugaber contributed to this report from Washington. Alex Veiga contributed from Los Angeles.

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