Government Rolls Out Long-Sought-After Anti-Foreclosure Program

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Fannie Mae (FNM) and Freddie Mac (FRE), the mortgage giants taken over by the federal government back in September, will lower monthly payments for hundreds of thousands of struggling U.S. homeowners as part of a plan to accelerate anti-foreclosure efforts, federal officials announced yesterday (Tuesday).

Fannie and Freddie, the nation’s two-largest mortgage holders, will target loans in which borrowers are 90 days or more delinquent, and have high loan-to-income ratios, Bloomberg News reported. The companies may offer homeowners reduced interest rates and longer terms of as much as 40 years to trim monthly payments. By rewriting the terms on some overdue loans, homeowners won’t have to pay more than 38% of their monthly income on housing payments, officials from the U.S. Treasury Department and the Federal Housing Finance Agency said at a news conference in the nation’s capital yesterday.

It’s the government’s most aggressive move yet in its battle to reverse the rising tide of mortgage defaults and home foreclosures, reported.

“Foreclosures hurt families, their neighbors, whole communities and the overall housing market,” said James B. Lockhart III, director of the Federal Housing Finance Agency. “We need to stop this downward spiral.”

The plan centers upon Fannie and Freddie because they are than operating under a government conservatorship, and because the two entities own or back roughly $5 trillion in loans, reported. The federal government took over the two government-sponsored enterprises back in September – not because of worries about the fading U.S. housing market, but because of concerns that foreign central banks in China, Japan, Europe, the Middle East and Russia might stop buying our bonds, a Money Morning investigative report showed. Fannie Mae on Monday reported a third-quarter loss of $29 billion.

The initiative expands efforts by the Hope Now Alliance, a group that U.S Treasury Secretary Henry M. “Hank” Paulson Jr. helped create last year. Hope Now is made up of investors, advocacy groups, and mortgage lenders and servicers such as Citigroup Inc. (C) and Wells Fargo & Co. (WFC). The past success rate for “curing” delinquent loans with modifications similar to what was proposed yesterday was about 50% for both prime and subprime mortgages.

“With such broad adoption, this new protocol will be a standard for the industry to quickly move homeowners into long-term sustainable mortgages,” Neel Kashkari, the U.S. Treasury's interim assistant secretary, and the architect of much of the housing legislation aimed at easing the U.S. real estate crisis, said in a prepared statement.

Mortgage Bankers Association Chief Economist Jay Brinkman conceded that “we realize that a number of those can’t be saved because of the borrower’s situation. But if we can save half of them, that’s a good result.”

While a number of major banks – including Citigroup, JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) – have announced loan-modification programs in recent weeks, those financial institutions hold only a fraction of the nation's mortgages compared with Fannie and Freddie.

Federal agencies have been slow to present their own plans to modify the loans of millions of “at-risk” homeowners – despite calls from congressional representatives and harsh criticism from housing advocacy groups. Those critics want the government to take a more direct role in preventing foreclosures.

Under the new program, mortgages on owner-occupied homes that are at least 90-days past due with a loan-to-value of 90% or more will be eligible for the streamlined modification, MarketWatch reported. Homeowners who are “underwater” – owe more on their home than it is worth – will be eligible. However, homeowners who purposefully default on their mortgage to get a modification will not be eligible. Borrowers who want to know if they qualify should contact the company they make their payment to each month – called the “servicer.”

To encourage them to take part in this program, these servicers will be paid a fee of $800 to modify loans.

Even with this program, the borrower ultimately still will be responsible for paying the full amount of the principal borrowed. The program is only designed to defer payment on part of that principal to make the monthly payment affordable, experts say.

Lockhart said the program would apply to loans guaranteed by Fannie or Freddie, including prime, Alt-A and subprime mortgages. Other kinds of loans may also be covered. Lockhart urged the private-label mortgage industry to adopt the modification plan as well, MarketWatch reported.
The program will start by Dec. 15.

Moody's (MCO) forecasts that even with loan modification programs, 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale, and another 1.9 million are projected to lose their homes in 2009, said.

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