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Administration officials are racing to find a way to use bailout funds to help homeowners. Stopping the foreclosure plague won’t be easy.

NEW YORK (CNNMoney.com) — This much we know — the Obama administration wants to set aside between $50 billion and $100 billion to address the foreclosure crisis.

But how exactly officials plan to address this bear of a problem remains to be seen.

Treasury Secretary Timothy Geithner is expected to lay out plans for the $350 billion remaining in the financial industry bailout package on Tuesday.

Geithner was originally scheduled to unveil the program Monday, but the Treasury Department announced Sunday that it was pushing back the plan by a day to allow Geithner and others in the Obama administration to focus on getting the stimulus bill passed in Congress.

It is unclear if Geithner will unveil a specific plan for tackling foreclosures Tuesday. But the administration has said for weeks that it will devote more resources to helping homeowners than its predecessor.

“We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives like Hope for Homeowners,” wrote Larry Summers, director of Obama’s National Economic Council, to congressional leaders last month.

Finding a foreclosure fix is daunting, experts said. It eluded the Bush administration, which preferred to try to entice mortgage services to voluntarily modify loans without committing government funds.

Obama faces similar hurdles.

“It’s been a real challenge,” said Scott Talbott, senior vice president for government affairs for the Financial Services Roundtable. “To come up with a widespread approach is very difficult.”
Potential plans

Obama’s plan may expand on the Federal Deposit Insurance Corp.’s streamlined loan modification program, which serves as a model for workouts being conducted by several banks and by Fannie Mae and Freddie Mac.

The FDIC’s program, which is underway at failed lender IndyMac, calls for making monthly payments more affordable by reducing interest rates, lengthening loan terms or deferring principal. Servicers aim to reduce payments to no more than 31% of a borrower’s monthly income. So far, more than 10,000 delinquent loans have been modified, and offers have been made to another 20,000 borrowers.

Summers has said that banks that receive bailout funds will be required to implement foreclosure prevention programs.

The Obama administration is expected to put some money behind the modification efforts. It’s likely any modification plan will come with incentives for servicers and with some type of backstop in case the borrower defaults again. FDIC Chairman Sheila Bair unveiled a $24.4 billion plan in November that offered servicers $1,000 and provided a guarantee to cover 50% of any losses in case of redefault. The proposal, which she estimates will help 1.5 million people avoid foreclosure, has gone nowhere so far.

Congressional lawmakers would require the president to develop a loan modification plan under the stimulus bill currently under debate in the Senate.

“Stemming the tide of foreclosures, which are at the heart of this economic crisis, must be one of our top priorities,” said Senator Chris Dodd, D-CT, in a statement late Friday night after the Senate approved his amendment to the stimulus plan that would require the Treasury Department to spend at least $50 billion in funds from the bank bailout on a loan modification program.

“By providing the Treasury with the authority and funds to design and implement a loan modification program, we can help nearly 2 million families nationwide…avoid losing their home,” Dodd added.

A major problem confronting the Obama administration, however, is what to do with the rising number of foreclosures stemming from unemployment. Loan modifications don’t work for these borrowers.

The only viable solution for these delinquent homeowners is to get the economy moving again so they can get jobs, experts said.

Along those lines, Shaun Donovan, the Secretary of the Department of Housing and Urban Development, said in an interview on CNN Saturday morning that creating jobs was the top way to address the foreclosure problem.

“What is really driving the foreclosure crisis right now is that people are losing their jobs. And so job number one is to pass a recovery bill that will add three to four million jobs in this country,” Donovan said.
Beyond bailout

To be sure, the administration’s efforts will go beyond the bailout package. Already, it’s likely the massive stimulus package will contain measures to spur homebuying, including a $15,000 tax credit for those purchasing a home. On deck is controversial legislation to allow bankruptcy judges to modify loans on primary residences.

Congressional Democrats are also looking to revamp the troubled Hope for Homeowners program, which was designed to refinance struggling borrowers into government-backed Federal Housing Administration loans. Few borrowers have signed up for the program, in part because of its high fees. Lawmakers hope to make it more attractive by easing the terms and providing incentives for servicers to participate.

In his statement late Friday, Dodd said his amendment would reform the program by reducing the upfront and annual premiums for borrowers, lowering the percentage of future equity that homeowners must share with the government and adding incentive payments to servicers.

Whatever the administration chooses to do, it should implement it quickly, experts said. Foreclosures continue to rise, with a new one started every 13 seconds, according to the Center for Responsible Lending.

“Every minute they delay someone is going to lose their home,” said Kathleen Day, the center’s spokeswoman. “The government was waited too long to act.”

NEW YORK – Some heartening news on housing and corporate earnings helped Wall Street set aside a little of its angst about the economy Tuesday. The Dow Jones industrials rose more than 100 points.

The National Association of Realtors said buyers stepped in to snap up properties at steep discounts in December, especially in the South and Midwest. Its seasonally adjusted index of pending sales for preowned homes rose 6.3 percent to 87.7 in the final month of the year from an upwardly revised November reading of 82.5. The news is welcome on Wall Street where investors are looking for any signs that the housing industry slide is slowing.

“The market is encouraged by the more upbeat report on housing, albeit from a low level,” said Alan Gayle, senior investment strategist at RidgeWorth Investments. “A key element of the current malaise is housing and credit-related. And the report on home sales suggests that we are making progress on that front.”

Stocks also gained following several better-than-expected earnings reports. Homebuilder D.R. Horton Inc. reported a loss for its latest quarter that was narrower than analysts anticipated thanks to cost cuts. Drugmaker Merck & Co. posted a profit for the fourth quarter. The earnings topped analysts’ expectations despite a decline in sales. Shipper UPS Inc. rose after investors grew relieved its results weren’t worse. Results from Schering Plough, another drugmaker, also came in ahead of estimates.

Not all earnings were stronger than expected, however. Mobile phone maker Motorola lost $3.6 billion. Analysts had been forecasting break-even results.

Financial stocks lagged the broader market Tuesday. PNC Financial Services Group Inc., one of the nation’s largest banks, said it swung to a loss during the fourth quarter because of charges tied to its recent acquisition of National City Corp. Even excluding the National City costs, PNC’s results fell short of analysts’ expectations. The Pittsburgh-based bank also said it would cut 5,800 jobs following the purchase. PNC shares fell 11 percent.

In midafternoon trading, the Dow Jones industrial average rose 112.30, or 1.41 percent, to 8,049.13.

Broader stock indicators also rose. The Standard & Poor’s 500 index rose 9.39, or 1.14 percent, to 834.83, and the Nasdaq composite index rose 12.22, or 0.82 percent, to 1,506.65.

The Russell 2000 index of smaller companies rose 1.51, or 0.34 percent, to 451.12.

Advancing issues outnumbered decliners by about 8 to 7 on the New York Stock Exchange, where volume came to 703.7 million shares.

Stocks ended mixed Monday, with the Dow and S&P lower and the Nasdaq higher. The indexes have fallen for four straight weeks due to growing worries about the economy. The Dow and S&P suffered their worst January ever — dropping more than 8 percent for the month.

Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.83 percent from 2.72 percent late Monday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.34 percent from 0.26 percent late Monday. The three-month yield is at the highest level since briefly going up to a half percent in December.

Gayle said investors are pleased to see the rise in the three-month yield because it suggests some fear is coming out of the market. Since last fall, investors have been pushing into T-bills looking for safety. They were willing to accept even the most modest of yields in return for protecting their money. Falling demand for T-bills suggests investors might be willing to take on more risk in areas like corporate debt and stocks.

“Investors are gradually putting money to work out there,” Gayle said. “We’re encouraged that although the economy has been beaten down very badly, that there are some signs of improvement.”

The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude rose 25 cents to $40.33 a barrel on the New York Mercantile Exchange.

Companies reporting results were mixed. D.R. Horton jumped $1.19, or 19 percent, to $7.30, while Merck rose $1.53, or 5.4 percent, to $29.96. UPS rose $2.32, or 5.5 percent, to $44.74. Schering Plough rose $1.18, or 6.8 percent, to $18.65.

Motorola fell 54 cents, or 12 percent, to $4.

Among financials, PNC Financial fell $3.67, or 11 percent, to $28.51. Bank of America Corp. fell 66 cents, or 11 percent, to $5.34.

Regional banks saw some of the biggest selling. SunTrust Banks Inc. fell $2.83, or 24 percent, to $9.12, while Fifth Third Bancorp fell 22 cents, or 10 percent, to $1.87.

Detroit automakers declined. Ford Motor Co. fell 4 cents, or 2.1 percent, to $1.84 after reporting its U.S. vehicle sales fell 40 percent in January. General Motors Corp. slid 21 cents, or 7.3 percent, to $2.68 after confirming it will offer buyouts to its hourly employees.

Overseas, Japan’s Nikkei stock average fell 0.62 percent. Britain’s FTSE 100 rose 2.13 percent, Germany’s DAX index rose 2.43 percent, and France’s CAC-40 rose 1.79 percent.

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