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Government to Roll Out New Program for At-Risk Mortgages

ServicesSource: Washington Post

The government and mortgage industry -- including federally run mortgage finance giants Fannie Mae and Freddie Mac -- plan to announce today a new streamlined system for modifying the mortgages of hundreds of thousands of borrowers to avoid foreclosure, according to two people familiar with the matter.

A news conference involving government officials and industry representatives has been scheduled for 2 p.m. in Washington. Under the program, Fannie Mae, Freddie Mac and other companies would move to modify mortgages for borrowers who are more than 90 days late on paying their loans and fit within certain formulas. That contrasts with the current system, where modifications are addressed on a case-by-case basis.

The goal of the new program would be for borrowers' annual mortgage payment to equal 38 percent of annual income, the model used successfully by the government with IndyMac in California. The companies would do that by extending the loan term, reducing the interest rate and, if necessary, delaying payment on a part of the principal of the loan. If a borrower is able to meet payments for three months, the change becomes permanent.

Scheduled to speak at today's news conference are James B. Lockhart III, the director of the Federal Housing Finance Agency, the regulator that runs Fannie Mae and Freddie Mac; Neel Kashkari, the interim assistant Treasury secretary for financial stability; Faith Schwartz, head of the Hope Now alliance of financial institutions that have agreed to take measures to reduce foreclosures; and Michael Heid, a senior mortgage executive at Wells Fargo.

Housing advocacy groups have been critical of Fannie Mae and Freddie Mac's willingness to take big steps to redo mortgages. But the Treasury Department, the FHFA and the new executives that the government have installed have pushed to do more. The companies have been testing "mass modifications" programs for some time.

Fannie Mae and Freddie Mac own or guarantee a majority of the nation's mortgages. They would mainly be able to adjust those mortgages they own.

The program doesn't go as far as Citigroup, which is announcing today that it will target at-risk borrowers current on their loan. The Citigroup plan could affect 500,000 at-risk borrowers in regions facing rising unemployment rates and steep declines in home values.

The program being announced today "is an important step forward for the industry," said Schwartz. "We have all worked hard to look at ways to streamline the process, to reach borrowers at risk and to add to the already substantial efforts that are already underway." She would not discuss the lenders involved or other details of the plan.

The industry does not view the new program as a repudiation of its previous efforts, which have mostly been through Hope Now, an industry official said. The group says it has kept 2.5 million borrowers from foreclosure.

A homeowner would have to be 90 days delinquent to qualify for the streamlined program.

In contrast, Citigroup is targeting homeowners current on their loans. It will attempt to modify the terms before the borrower becomes delinquent. "With the unemployment rate rising and rising, more and more borrowers are getting into financial distress because of loss of income," said Sanjiv Das, chief executive of CitiMortgage. "It is a problem the country will face for some time to come, so it is very important to reach out to borrowers before they become delinquent."

The housing market has been at the center of the financial meltdown. Today home builder Toll Brothers released bleak quarterly earnings and its chief executive, Robert I. Toll, urged that the government's plans to right the economy must include more to get the housing sector back on track.

"We believe the government's efforts must concentrate on stopping the decline in home prices. . . . Congress has allocated hundreds of billions of dollars to reset mortgages, help people who are in foreclosure and protect those who have been the victims of rapacious lending practices. We believe all of these goals are very worthy. However, we believe that, if home prices are not stabilized, these efforts will be for naught, more mortgages will go under, and the taxpayers' money will have been wasted."

Major banks are testing loan-modification programs in the face of political pressure to do more to help struggling homeowners. J.P. Morgan Chase said recently said that it will begin modifying mortgages under a program that could keep 400,000 families in their homes. Bank of America plans to modify an estimated 400,000 subprime loans held by Countrywide Financial, which it recently acquired.

The House Financial Services Committee is scheduled to hold a hearing tomorrow on private-sector mortgage-modification efforts. Meanwhile, the Federal Deposit Insurance Corp. and Treasury Department are continuing to discuss a plan for the government to guarantee mortgages of millions of distressed homeowners if lenders agree to significant loan modifications.

Unlike other modification programs, Citigroup officials said, their program will focus not on whether homeowners have subprime or other risky loans, but instead on whether they are at risk of falling behind because they live in an area with high unemployment or declining home prices. Borrowers could be eligible for an interest rate as low as 3 percent or could have their terms stretched to 40 years to make the payments more affordable. If neither of those options works, Citigroup will consider deferring interest payments on a portion of the principal.

In some ways, the plan also is similar to the program the FDIC launched when it took over failed bank IndyMac, Das said. As in the IndyMac model, Citigroup would rely on a formula to quickly determine who is eligible for a modification. "It almost replicates the IndyMac/FDIC model completely," he said.

But like many loan-modification efforts, Citigroup's program is limited to loans that it owns. The bank must separately obtain permission from investors, who own 4 million loans serviced by the bank, to include those borrowers in the program. "We are in active discussions with investors. We have had a good response from them," Das said.

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