Mammoth Blog

Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, will accelerate anti- foreclosure efforts with a new loan modification program designed to cut monthly payments for struggling homeowners.

Fannie and Freddie, operating under a government conservatorship, will target loans in which borrowers are at least 90 days delinquent and have high loan-to-income ratios, officials from the Treasury and the Federal Housing Finance Agency said today at a press conference in Washington. The companies may offer reduced interest rates and longer terms of as much as 40 years to trim monthly payments.

``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 Treasury's interim assistant secretary, said in a prepared statement.

The initiative expands efforts by the Hope Now Alliance, a group of investors, advocacy groups, and mortgage lenders and servicers such as Citigroup Inc. and Wells Fargo & Co. that Treasury Secretary Henry Paulson helped create last year. The success rate for ``curing'' delinquent loans by modifying their loan terms similar to the latest program was about 50 percent for both prime and subprime borrowers with damaged credit, according to data from the Mortgage Bankers Association.

``We realize a number of these can't be saved because of the borrower's situation,'' said MBA Chief Economist Jay Brinkmann. ``But if we can save half of them, that's a good result.''

California, Florida and other high-cost real estate markets where borrowers have larger debt loads or nontraditional mortgages will likely reap the most from the program, he said.

A Central Role

Paulson has called housing recovery central to the economy's revival and urged Fannie and Freddie to play a bigger role.

``If housing doesn't get stabilized, it's really going to continue to bleed the economy,'' said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, and Bloomberg's most-accurate economic forecaster for 2008.

Under the proposal, mortgage servicers will work with borrowers to reduce monthly payments to 38 percent of their gross income, a level considered a threshold for affordability, using a combination of lower principals, interest-rate reductions and extensions, the people said. The plan doesn't include money from the Treasury's $700 billion bank rescue.

Homeowners will have to apply for the program, and their loan modifications won't become final until they have made three consecutive payments. Their new monthly payment will include all of their monthly housing costs, such as taxes and even condominium payments, one person said.

Bair Objects

Federal Deposit Insurance Corp. Chairman Sheila Bair, who has advocated using some of the money from a $700 billion bank rescue program to help with loan modifications, said today's announcement doesn't go far enough.

``This is a step in the right direction but falls short of what is needed to achieve widescale modifications of distressed mortgages,'' Bair said in a statement sent by e-mail. ``As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans.''

Bair said there are still questions about implementation including: Allowing extended amortization prior to interest rate reductions; the length of caps on payment increases, interest rate caps; and compliance reporting, according to the statement. source>>>