-- The federal government and one of the country's largest banks are expanding their efforts to help homeowners with troubled mortgages avoid joining the millions of Americans who have already lost their homes to foreclosure.
Fannie Mae fnm and Freddie Mac fre, which own or guarantee nearly 60% of all single-family home mortgages, said Tuesday that they will accelerate the process for modifying thousands of home loans.
In addition, Citigroup c announced it will expand its moratorium on foreclosures and initiate a new program to assist borrowers who may develop problems paying their mortgages.
Both efforts show how the Bush administration and private lenders are scrambling to cope with an unprecedented wave of home foreclosures.
The government is working on a plan to help as many as 3 million homeowners avert foreclosure.
Sheila Bair, the head of the Federal Deposit Insurance Corp. and the government's most vocal advocate for stronger measures to help homeowners, said Tuesday that the Federal Housing Finance Agency program would not do enough to prevent "unnecessary foreclosures."
While the government is investing hundreds of billions of dollars in financial institutions suffering from losses related to bad mortgages, "We must also devote some of that money to fixing the front-end problem: too many unaffordable home loans," Bair said.
Foreclosure filings rose 71% in the third quarter from a year earlier according to RealtyTrac. Home prices continue to fall in many areas, and stricter mortgage standards make it harder for homeowners to sell or refinance. About 4 million borrowers are at least one payment behind, according to the Mortgage Bankers Association.
Some economists say lenders are taking steps on their own to aid homeowners because troubled mortgages remain a financial risk to banks. Also, lenders taking steps now have a chance to establish a record of taking action rather than waiting for a government-imposed mandate.
"The problem has become so great, so everybody is trying to get out and do something. The financial sector understands that unless they get these loans off their books, they'll just be bleeding," says Joel Naroff of Naroff Economic Advisors. "That's good, because if all we do is wait for a government bailout, nobody has the infrastructure to handle the problem."
Fannie, Freddie plans
Mortgage-finance giants Freddie Mac and Fannie Mae aim to swiftly reduce monthly mortgage payments for some of the nation's most delinquent borrowers, accelerating the government's efforts to curb home foreclosures.
The loan modification program announced Tuesday is directed at some of the 31 million mortgages, 58% of the nation's total, that are owned or guaranteed by Freddie or Fannie.
Borrowers are eligible if they have missed three payments or more, own and occupy the property as a primary residence and have not filed for bankruptcy, said James Lockhart, director of the Federal Housing Finance Agency (FHFA), which took over Freddie and Fannie in September.
Homeowners could have their mortgage term extended, have their interest rate reduced or be allowed to defer payment of the principal until the end of the loan. The program aims to reduce the borrowers' housing debt to no more than 38% of their gross monthly income.
Fannie and Freddie, the FHFA, the Federal Housing Administration and the Treasury worked with Hope Now, an industry group that has partnered with 27 financial institutions that service mortgages. Hope Now was begun last year with the encouragement of the Treasury Department to help distressed homeowners.
With foreclosures up nearly 150% from two years ago and mortgage delinquencies triple what they were, "We need to stop this downward spiral," Lockhart said.
Lockhart pointed out that the program does not get at the toughest part of the mortgage problem: the loans that have been packaged into mortgage-backed securities and are now held by Wall Street firms or other investors.
"Private-label securities represent less than 20% of the mortgages but 60% of the serious delinquencies," he said.
Another federal official said the FHFA effort wasn't enough.
Sheila Bair, the Federal Deposit Insurance Corp. chairman, said the FHFA plan falls short, particularly in dealing with mortgages held by private investors.
"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 has won praise for the FDIC's effort to modify delinquent loans owed by customers of failed IndyMac Bank, one of the nation's largest subprime lenders, which the FDIC took over this year.
She said Tuesday that she still has questions about how the Freddie-Fannie plan will work.
Citigroup is launching a plan to prevent mortgage defaults by helping about 130,000 borrowers who live in areas with rising unemployment and plummeting home prices — an initiative that could modify $20 billion in home loans.
The plan, which begins now and lasts six months, will use trained counselors to reach out to about 500,000 homeowners with mortgages held by Citi. These homeowners are not yet behind on loan payments but may need help to remain current on their mortgages.
The announcement follows similar efforts by other lenders to slow the galloping pace of foreclosures. Those include the Federal Deposit Insurance Corp.'s program for IndyMac Bank borrowers as well as Bank of America and JPMorgan Chase.
Citi's program is among the first to target homeowners who are not delinquent on payments, and it isn't just for borrowers with specific types of loans, such as subprime mortgages, says Sanjiv Das, CEO of CitiMortgage.
"We believe it's important to reach out to the customer before they get into delinquencies and defaults. It's too late when it's already in foreclosure," Das says. "We will identify people whose economic conditions have changed and underwrite the loan."
Since 2007, Citi says, it has helped about 370,000 families avoid foreclosure on their homes, representing more than $35 billion in mortgages.
Under the program:
•Homeowners targeted for help will be in areas with plummeting home prices and high unemployment rates, including Arizona, California, Florida, Michigan, Ohio and Indiana. Calls, letters, e-mail and other efforts will be used to contact borrowers to try to avoid delinquencies.
•Citi will modify mortgages when homeowners can show a change in their financial circumstances, such as a job loss. The process is expected take about a third as much time as preparation of a new loan. As with many other lenders, changes may include adjusting rates and extending a loan's term.
•Citi is also extending indefinitely its moratorium on foreclosures for eligible homeowners. To qualify, homeowners must be seeking to stay in their homes as a primary residence, work in good faith with Citi, and have enough income for more-affordable mortgage payments.
The FDIC's program for IndyMac borrowers has allowed them to obtain more-affordable mortgages, with interest rates slashed to as little as 3% for the first five years.
Through Bank of America, up to 400,000 homeowners will be able to get more-affordable loans under an agreement by the bank to modify mortgages that originated with Countrywide Financial, which the bank now owns. The agreement settles cases brought by states' attorneys general and could mean $8.6 billion in loan relief for borrowers.
JPMorgan Chase began a plan last month of modifying mortgages so that 400,000 families may stay in their homes. The plan includes lowering interest rates and temporarily reducing loan balances.