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.

The administration is also pushing for legislation that would allow bankruptcy judges to alter loan terms. The U.S. House of Representatives is expected to pass a bill on Thursday that would allow these mortgage cramdowns and shield firms that ease loan terms from investor lawsuits.

STEMMING A DEEP HOUSING SLIDE

U.S. home prices have swooned by more than 26 percent since peaking in mid-2006, according to Standard & Poor's/Case-Shiller indexes, and are widely expected to slide further.

The perfect storm of fast-eroding home values just as unemployment has climbed to a 16-1/2-year peak has propelled foreclosures to all-time highs and thrust the U.S. housing sector into its deepest downturn since the Great Depression.

The Obama plan will provide some real relief for some people who need it, but I'm only modestly optimistic that we're going to see a significant reduction in foreclosures, said Mark Vitner, senior economist with Wachovia Corp in Charlotte, North Carolina.

He said restrictions on the program for loan amounts, owner occupancy and financial hardship would limit its effectiveness in key markets such as California, Nevada and Florida that have a high percentage of investor-owned homes in trouble.

LOAN DEMAND FALLS

Requests for loans to buy homes and refinance mortgages dropped for a second straight week as potential borrowers held back in hope of even lower mortgage rates and help from the Obama rescue program.

The Mortgage Bankers Association's applications index slid by nearly 13 percent to about half the level it had reached earlier this year when loan rates hit a low 4.89 percent. The average 30-year mortgage rate last week was 5.14 percent.

U.S. banking regulators urged lenders and mortgage servicers to participate in the loan-modification program, which they said would promote sustainable alternatives to foreclosures.

Foreclosure sales were an ironic bright spot for the ailing housing market in 2008, real estate data company Radar Logic said. These distressed transactions made up as much as a third of all activity last year, surging as all other sales fell.

Buyers recognize that those are at significant discounts versus what all other people are asking for homes and are migrating to those first, said Radar Logic chief executive Michael Feder.

He said the administration's plans will help curb monthly payments and spur refinancing, but will do little to help potential owners come up with the increasingly large down payments that lenders require.

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