The government and the mortgage industry leaders announced the launch of the most sweeping effort yet to aid distressed homeowners by accelerating the process for loan modifications hundreds of thousands of delinquent loans held by Fannie Mae and Freddie Mac.  FHA, which seized control of the two mortgage finance companies in September, announced the plan Tuesday along with other U.S. government and industry officials, including Hope Now, an alliance of mortgage companies organized by the Bush administration last year.  “Foreclosures hurt families, their neighbors, whole communities and the overall housing market,” said James Lockhart, the housing finance agency’s director. “We need to stop this downward spiral.”

The mortgage modification plan could have tremendous importance because Fannie Mae and Freddie Mac own or guarantee nearly 31 million U.S. mortgage loans or nearly 6 of every 10 outstanding. Still, government officials did not have an estimate of how many people would qualify for the new program.  Officials hope the new approach, which goes into effect December. 15., will become a model for loan servicing companies, which collect money for mortgage lenders and then distribute them to investors. These companies have been roundly criticized for being slow to respond to a surge in defaults.

To qualify, borrowers would have to be at least three months behind on their home loans, and would need to owe 90 % or more than the home is currently worth. Investors who do not occupy their homes would be excluded, as would borrowers who have filed for bankruptcy.  Borrowers would get help in several ways: The interest rate would be reduced so that borrowers would not pay more than 38 % of their income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free.  While mortgage lenders have beefed up their efforts to aid borrowers over the past year, their earlier efforts have not kept up with the worst housing recession in decades.

And critics were quick to pour water on the latest plan.  “Instead of a massive foreclosure prevention program, we wait for a homeowner to be in a failing position before doing anything, which often is too late,” said John Taylor, president and CEO of the National Community Reinvestment Coalition.  “It’s been the foreclosures that have been driving the economic downturn and we’ve been saying that for 13 months now. To stop the bleeding is to end foreclosures,” he continued. “But now that so many other sectors in the economy have fallen, I’m not sure if we’re past the point of no return. It’s appalling that they don’t get.”

More than 4 million American homeowners, or 9 % of borrowers with a mortgage were either behind on their mortgage payments or in foreclosure at the end of June, according to the most recent data from the Mortgage Bankers Association.  According to former WMC mortgage executive, Scott Hess, “The clock is ticking for distressed homeowners who are looking to stop the foreclosure process and it’s about time the government stepped in to provide some much needed mortgage relief.” 

Tuesday’s announcement comes too late for Troy Courtney, a 44-year-old San Francisco police officer.  He moved out of his home in Mill Valley, Calif., at the start of this month — taking his children, three dogs and one cat with him — after failing at several to attempts to get a loan modification, loan work-out or a short sale — where the lender agrees to receive less than the loan is worth.  Courtney worked overtime and tapped into his retirement account to try to catch up with two loans on his home. But in the end he couldn’t convince Countrywide Financial, which managed the loan for Wells Fargo, to modify the loan.  “I feel like I missed the boat,” he said of the new efforts to help more homeowners. “I’m just mad at the whole system.”

One reason the problem has been so tough to solve for borrowers like Courtney is that the vast majority of troubled loans were packaged into complicated investments that have proven extremely difficult to unwind.  Deutsche Bank estimates more than 80 percent of the $1.8 trillion in outstanding troubled loans have been packaged and sold in slices to investors around the world. And it appears the majority of those loans will not be helped by the new plan.  The remaining 20 percent are “whole loans,” which are easier to modify because they have only one owner.   Nevertheless, Tuesday’s announcement coupled with recent and more aggressive strategies from the major retail banks are important steps to correct the foreclosure crisis. After more than a year of slow and weak initiatives, there appears to be a serious effort to get at the heart of the credit crisis: falling U.S. home prices and record foreclosures.

Citigroup announced late Monday it is halting foreclosures for borrowers who live in their own homes, have decent incomes and stand a good chance of making lowered mortgage payments. The New York-based banking giant also said it is also working to expand the program to include mortgages for which the bank collects payments but does not own.  Additionally, over the next six months, Citi plans to reach out to 500,000 homeowners who are not currently behind on their mortgage payments, but who are on the verge of falling behind. This represents about one-third of all the mortgages that Citigroup owns, the bank said.  Citi Mortgage plans to devote a team of 600 salespeople to assist the targeted borrowers by adjusting their rates, reducing principal or increasing the term of the loan.   

Late last month, Chase expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 customers. The mortgage lending giant has already modified about $40 billion in mortgage loans, helping 250,000 customers since early 2007.  Bank of America recently stated that beginning Dec. 1, it will modify an estimated 400,000 home loans held by newly acquired Countrywide Home Loans as part of an $8.4 billion legal settlement reached with 11 states in early October.

4 Comments »

1. 

   I recently came across your foreclosure prevention blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog featuring California short sale and foreclosure insight. I will keep visiting this blog very often.

   Comment by California loan modifications — November 11, 2008 @ 7:11 pm

2. 

   Hopefully this FHA loan program will be beneficial to borrowers behind on their mortgage. Thanks for the info.

   Comment by FHA home Loan — November 12, 2008 @ 11:09 am

3. 

   Loan modification mortgage is a process whereby a home owner’s mortgage is modified and both the lender and homeowner are bound by the new terms of the new mortgage. The most common loan modifications are listed below:

   Lowering the mortgage interest rate
   Reducing the mortgage principal balance
   Fixing adjustable interest rates within the mortgage
   Increasing the loan term throughout the mortgage
   Forgiveness of payment defaults and fees
   or any combination of the above

   Check out this Public site at http://www.renegotiatemortgagerates.com

   Comment by mortgage modification — November 27, 2008 @ 4:21 pm

4. mortgage loan modification…
   Brokers send you borrowers who are turned down to the Loan Modification Outlet. They were able to help our clients negotiate mortgage rates that were better than refinancing the traditional way. Thanks for your help!

   Trackback by mortgage loan modifications — November 29, 2008 @ 2:04 am

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