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Government launches sweeping new loan aid effort
WASHINGTON – Nov. 12, 2008 – The government and the mortgage industry are
launching the most sweeping effort yet to help troubled homeowners by speeding
up the process for renegotiating hundreds of thousands of delinquent loans held
by Fannie Mae and Freddie Mac.
The Federal Housing Finance Agency, which seized control of the two mortgage
finance companies in September, announced the plan Tuesday along with other
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 plan could have tremendous importance because Fannie Mae and Freddie Mac
own or guarantee nearly 31 million U.S. mortgages, or nearly six 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 Dec. 15., will become a
model for loan servicing companies, which collect mortgage payments and
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 percent 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 percent 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 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 it.”
More than 4 million American homeowners, or 9 percent of borrowers with a
mortgage were either behind on their payments or in foreclosure at the end of
June, according to the most recent data from the Mortgage Bankers Association.
Indeed, 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 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 fix the housing
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 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, JPMorgan Chase & Co expanded its mortgage modification
program to an estimated $70 billion in loans, which could aid as many as 400,000
customers. The New York-based bank has already modified about $40 billion in
mortgages, helping 250,000 customers since early 2007.
Bank of America, meanwhile, has said that starting Dec. 1, it will modify an
estimated 400,000 loans held by newly acquired Countrywide Financial Corp. as
part of an $8.4 billion legal settlement reached with 11 states in early October.