Why Mortgage Rescue Plans Aren't Enough

The Government's Mortgage Plan

In a press conference Tuesday, federal officials announced the government's latest program aimed at foreclosure prevention: It targets homeowners who are 90 days past due on loans that are owned or guaranteed by government-run mortgage giants Fannie Mae and Freddie Mac.

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The plan, which is modeled after a foreclosure prevention program instituted by the Federal Deposit Insurance Corporation at IndyMac Bank, would let eligible homeowners modify their loans so that their monthly payments amount to no more than 38 percent of their income. The modifications could include reduced interest rates, longer loan terms or deferred payments on loan principals.

At the press conference, Federal Housing Finance Authority Director James Lockhart urged servicers of mortgage-backed securities, and investors in those securities, to use the new government program as the standard for the industry as a whole.

"Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values," he said.

Still, some critics say that urging servicers to voluntarily adopt the government's program isn't enough. Rheingold and Engel both say they'd like to see the government implement programs that would make loan modifications mandatory.

Thanks to a string of lawsuits, the government is forcing modifications on some loans owned by investors. Last month, Bank of America, which bought Countrywide Financial Corporation earlier this year, agreed to a settlement with 11 state attorneys general to cut interest rates and principals for nearly 400,000 Countrywide customers.

The attorneys general had filed complaints against Countrywide, alleging deceptive lending practices.