A new plan to streamline loan modifications for homeowners who have fallen behind on their mortgage payments could help "hundreds of thousands" of borrowers avoid foreclosure.
But the plan is far less ambitious than a competing proposal for the government to guarantee payments on as many 3 million loan modifications.
With Fannie Mae, Freddie Mac and the HOPE NOW alliance of 27 loan servicers standing behind it, the new streamlined modification program rolled out today by the Bush administration is expected to provide thousands of delinquent borrowers another alternative to foreclosure. In the past, much of the administration’s efforts have centered around loan refinancing programs guaranteed by the Federal Housing Administration.
The new loan modification program is targeted at high-risk borrowers who have missed three or more mortgage payments on their primary residence but who have not filed for bankruptcy. The program is designed to get them current on their loans again by reducing their payments to 38 percent of gross monthly income.
To get monthly payments down to that level, lenders and loan servicers may agree to extend the term of the loan to up to 40 years, lower the interest rate on the loan, or reduce principal and add it to the back of the loan.
Lenders who decide they cannot create an affordable payment using the streamlined program will further evaluate the borrower’s situation under a standard modification process, which requires an analysis of the borrower’s personal cash flow.
By reducing documentation requirements and simplifying the analysis, "potentially hundreds of thousands of delinquent borrowers" will receive modification offers in the mail, said FHA Commissioner Brian Montgomery at a press conference announcing the program.
Federal Housing Finance Agency Director James Lockhart said Fannie Mae and Freddie Mac will issue guidance to their loan servicers and require them to implement the streamlined loan modifications by Dec. 15.
Fannie Mae and Freddie Mac — which were placed in conservatorship by the government on Sept. 6 — own or guarantee about 58 percent of all single-family mortgages. But those mortgages represent only 20 percent of serious delinquencies, Lockhart said.
Some 60 percent of seriously delinquent mortgages have been "sliced and diced and sold to investors" in private-label mortgage-backed securities, Lockhart said.
Those investors may be more reluctant than Fannie and Freddie to implement the streamlined modification program. Although the HOPE NOW alliance of loan servicers has endorsed the measures, participation is voluntary.
Lockhart said that Fannie Mae and Freddie Mac leadership and the endorsement by HOPE NOW members, "should spread this approach throughout the whole mortgage loan servicing business."
Lockhart told Senate lawmakers at a hearing last month that Fannie and Freddie had engaged in 130,971 workouts from January to August of this year, including 36,847 loan modifications.
The HOPE NOW alliance said today that its members have helped nearly 2.5 million borrowers through means including workouts, loan modifications, short sales and refinancings.
One reason lenders might be reluctant to modify the terms of many loans is that, with the economy slowing and home prices in many markets continuing to fall, there is no guarantee that borrowers they help will stay current on their newly modified loans.
FDIC Chairwoman Sheila Bair maintains that the $700 billion troubled asset repurchase program (TARP) approved by Congress gives the Treasury the authority to use loan guarantees and credit enhancements to facilitate loan modifications in order to prevent foreclosures.
The FDIC had reportedly proposed a $500 billion government loan guarantee program intended to give lenders with the incentive to modify up to 3 million troubled mortgages, at a potential taxpayer cost of $50 billion (see story).
But the Bush administration did not embrace the proposal, and the streamlined modification program announced today appears to be an alternative plan.
Initiatives by lenders
In recent weeks, several major lenders including Citigroup, JP Morgan Chase and Bank of America have announced their own major initiatives to engage in workouts and loan modifications with troubled borrowers.
Citgroup Inc. today said that over the next six months, it plans to contact about 500,000 homeowners who still are current on their mortgage payments, but may require help in the future.
The Citi Homeowner Assistance program will be concentrated in areas that are facing "extreme economic distress," such as Arizona, California, Florida, Indiana, Michigan and Ohio, and is expected to lead to workouts on $20 billion in mortgages. Citi said that since early last year, its loss mitigation efforts have prevented about 370,000 foreclosures on $35 billion in loans.
JP Morgan Chase, which saw its loss mitigation workload grow when it acquired Washington Mutual Bank in September, announced last month that it would open regional counseling centers and offer borrowers pre-qualified loan modifications in the hope of preventing 400,000 foreclosures on $70 billion in loans in the next two years.
Chase said it would not take steps to put additional loans into the foreclosure process while it implemented the changes over about 90 days. The initiative and foreclosure moratorium apply only to owner-occupied homes with mortgages owned by Chase, WaMu and another subsidiary EMC Mortgage Corp. But Chase said it would "work diligently with investors" for approval to apply the program to loans it services on their behalf.
Chase said that since early 2007, the bank and its subsidiaries have prevented foreclosures on about 250,000 loans totalling $40 billion, primarily through modifying loan terms or payments.
Bank of America has also become more active in conducting loan workouts and modifications since acquiring troubled lender Countrywide Financial Corp. In April, Bank of America said it planned to modify $40 billion in troubled mortgages, or 265,000 loans, over the next two years.
Last month Bank of America reached a settlement with about a dozen states that sued Countywide over alleged unfair and deceptive lending practices. BofA agreed to systematically modify nearly 400,000 troubled Countrywide mortgages with up to $8.4 billion in interest rate and principal reductions (see story).
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