U.S. launches $75 billion mortgage plan to aid homeowners

By David Lawder and Lynn Adler

WASHINGTON/NEW YORK (Reuters) - The Obama administration on Wednesday launched a $75 billion foreclosure relief plan, as new data showed one in five U.S. homeowners with mortgages owe more than their house is worth.

The mortgage plan, part of a $275 billion housing stimulus program announced last month, enables struggling homeowners to modify loans even if they are "under water."

Homeowners with mortgages on about 8.3 million properties were under water at the end of 2008 and the distress is likely to grow as home values drop, First American CoreLogic said.

The eligibility guidelines for the mortgage modification program unveiled by the U.S. Treasury aim to target relief to people facing imminent hardship. Their release opens the door for borrowers who are delinquent in their payments or at risk of falling behind to begin pressing for altered terms.

The program, which offers cash incentives to loan servicers to cut monthly payments, will only modify mortgages on single-unit homes up to $729,750, with higher limits for multiple-unit owner-occupied properties. It would only apply to loans originated before January 1.

Homeowners who stay current on modified loans will see their principal reduced by up to $5,000 and lenders will get additional incentives for extinguishing second-lien home equity loans.

The Treasury also announced that lenders could begin refinancing mortgages owned or guaranteed by Fannie Mae or Freddie Mac on homes whose values have dropped.

Being under water, or having negative equity, has previously ruled out refinancing. The Obama administration program seeks to ease payments and prevent foreclosures for struggling borrowers and allow standard refinancings for stronger borrowers whose homes values have eroded.