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Debt Forgiveness Key In Plan To Curb Foreclosures

The Obama administration is expanding help for homeowners facing foreclosure — especially those who owe more than their homes are worth — with a new initiative being unveiled Friday. Some economists hope it will be a breakthrough in propping up the housing market, a key to fixing the economy.

The new effort marks a dramatic shift in the government's approach to the foreclosure crisis. It puts homeowners who are "underwater" — and there are a lot of them — front and center. Analysts say 24 percent of all homeowners with mortgages owe more than their house is worth, and many are struggling to make their payments.

If too many give up and foreclosures keep rising, that's a big threat to the economy.

"The promise of this program is that it's focusing on debt forgiveness," says Chris Mayer, an economist at Columbia Business School. He says he likes that the Treasury Department will now push lenders to reduce the amount that some homeowners owe.

Mayer says that might stop a lot of people from giving up on paying the mortgage and walking away from their homes.

"If you can reduce the principal on their mortgage so they get right-side up again, the incentives to start paying are a lot bigger," he says, "and that fundamentally changes the decision-making for the household."

So, why would a lender want to cut homeowners a break on what they owe? In many cases, the lender would lose more in a foreclosure. There are legal costs — and houses sit vacant, the pipes freeze. The lender wants somebody living there and paying something.

Under the plan, borrowers would have to stay in their home, making payments, for three years to get that debt forgiven.

Still, that might sound good, but Mayer can't help being a bit skeptical.

"We've seen many, many announcements over the last two years about programs that are going to help millions and millions of people," he says. "And this problem is just much harder than we'd like to believe it is."

Right now, upwards of 4 million people are heading toward foreclosure. Homeowners complain the banks are all tangled up just fielding all the phone calls and paperwork. Banks say many homeowners don't return their calls. Some people who don't need help are trying to get it.

Mayer says the new Treasury Department plan is not going to be a silver bullet to fix all of that. But, he says, if the plan is done right it might help hundreds of thousands of people.

Some who are following the housing crisis closely think it'll do even more.

"This is very exciting," says Mark Zandi, chief economist of Moody's Analytics. "I think it has the potential to be a game changer, to really bring a quicker end to this foreclosure crisis that is engulfing the housing market and the economy. I'm very encouraged."

Zandi says he still needs to examine the specifics as they emerge Friday, but he thinks this focus on debt forgiveness could help prop up home prices around the country — maybe even stop prices from falling.

"I think this could mark the end of the housing crash, yes," he says. "We've been in a long slide for four long, painful years, and this could mark the definitive end of that."

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