US Expands Program to Modify Troubled Mortgages

The US government and 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.

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The Federal Housing Finance Agency, which seized control of the two mortgage finance companies in September, announced the plan Tuesday along with officials from the Treasury Department, Wells Fargo, the Department of Housing and Urban Development and Hope Now, an alliance of mortgage companies organized by the Bush administration last year.

It likely will have tremendous importance because Fannie Mae and Freddie Mac own or guarantee about half of U.S. home loans.

The approach, which goes into effect Dec. 15., "will be a standard for the industry to quickly move homeowners into long-term sustainable mortgages," said Neel Kashkari, the Treasury Department's assistant secretary for financial stability in prepared remarks.

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.

The interest rate would be reduced so that borrowers would not pay more than 38 percent of their income on housing expenses. (See James Lockhart, FHFA director, discuss the government's new loan plan, left.)

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.

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.

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"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.

The remaining 20 percent are "whole loans," which are easier to modify because they have only one owner.

(Fannie Mae and Freddie Mac set to unveils new plans to help homeowners avoid foreclosures. Watch the accompanying video for more...)

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 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 as part of an $8.4 billion legal settlement reached with 11 states in early October.

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