The Bush administration on Tuesday announced another plan to modify what it thinks will be hundreds of thousands of distressed mortgages held or backed by mortgage finance giants Fannie Mae and Freddie Mac.
More than 15 months into a deep, nationwide housing slump, several federal agencies, along with Fannie and Freddie, unveiled what they called a streamlining of modification procedures for delinquent loans. Officials hope the effort, which begins Dec. 15, will become a standard across the private sector.
“Troubled borrowers eligible for this program have already experienced significant erosion in their credit scores, making them unlikely to obtain mortgage credit through typical means,” said James Lockhart, the director of the Federal Housing Finance Agency, which has assumed responsibility for Fannie and Freddie since the Treasury Department seized them in September. Together, Fannie and Freddie own or back about 58 percent of all U.S. mortgage debt – about 31 million mortgages.
The plan is far short of the moratorium on foreclosures sought by President-elect Obama and the Democrats who next year will have stronger control in Congress. The move follows announcements by private lenders such as Bank of America, J.P. Morgan Chase and Citigroup that they would rework troubled mortgages.
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However, the plan announced Tuesday reaches only a small number of homeowners whose loans were pooled with others and sold to investors by Fannie and Freddie as bonds called mortgage-backed securities. The effort also would help an even smaller number of loans that Fannie and Freddie haven't packaged and pooled but retain on their books.
Because Fannie and Freddie were congressionally chartered private companies, they had tighter lending requirements than the companies that securitized, or pooled, mortgages for sale to investors. Fannie's foreclosure rate through the end of September was 1.6 percent, versus nearly 20 percent for subprime adjustable-rate mortgages packaged and sold by Wall Street firms.
To qualify for the new program, homeowners whose loans are owned or packaged by Fannie and Freddie must be 90 days or more past due on their payments for single-family dwellings in which they live. They must prove hardship, can't be in bankruptcy and their outstanding loan values must be at least 90 percent of their homes' current values.
That's important, since the program targets homeowners who are nearly or completely underwater, owing more than their homes are worth in a sinking market. If the program's thresholds are met, Fannie and Freddie will modify the mortgage with the goal of a monthly payment equal to about 38 percent of the holder's total income.
The goal could be achieved three ways: The loan could be stretched into a 40-year fixed-rate mortgage; the interest rate could be reduced; and/or money going to the mortgage balance, called the principal, could be deferred interest-free until the end of the loan and recaptured in what's known as a balloon payment. Fannie and Freddie will pay $800 to financial institutions for each loan they modify.
Officials involved in the plan acknowledged that it might reach 200,000 or so homeowners at best next year. That's a fraction of the 2.8 million who are thought to face foreclosure this year.
Tuesday's plan was patterned after similar efforts by the Federal Deposit Insurance Corp., but it didn't go far enough for FDIC Chairman Sheila Bair.
“This is a step in the right direction but falls short of what is needed to achieve wide-scale modifications of distressed mortgages,” said Bair, a critic within the Bush administration of current mortgage-rescue efforts.
“Given continually rising foreclosures and their impact on the economy, we must address the need for appropriate economic incentives to prevent unnecessary foreclosures,” she said. “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.”
Democrats on Capitol Hill weren't satisfied, either. “When the loan is chopped up into a million pieces and any investor can block a modification from happening, a program like this will only scratch the surface of the mortgage crisis,” said Sen. Charles Schumer, D-N.Y.