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The government and the 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.
The Federal Housing Finance Agency, which seized control of the two mortgage finance companies in September, announced the plan Tuesday along with other government and industry officials, including Hope Now, an alliance of mortgage companies organized by the Bush administration last year.
"Foreclosures hurt families, their neighbors, whole communities and the overall housing market," said James Lockhart, the housing finance agency's director. "We need to stop this downward spiral."
The plan could have tremendous importance because Fannie Mae and Freddie Mac own or guarantee nearly 31 million U.S. mortgages, or nearly six of every 10 outstanding. Still, government officials did not have an estimate of how many people would qualify for the new program.
Officials hope the new approach, to go into effect Dec. 15, will become a model for loan-servicing companies, which collect debts owed to mortgage companies and distribute them to investors. Loan-servicing companies have been roundly criticized for being slow to respond to a surge in defaults.
To qualify, borrowers would have to be at least three months behind on their home loans, and would need to owe 90% or more of their home's current value. Investors who do not occupy their homes would be excluded, as would borrowers who have filed for bankruptcy.Borrowers would get help in several ways: The interest rate would be reduced so that borrowers would not pay more than 38% of their income on housing expenses. 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% 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 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.
"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.
The heart of the credit crisisDeutsche Bank estimates more than 80% of the $1.8 trillion in outstanding troubled loans have been packaged and sold in slices to investors around the world.
The remaining 20% are "whole loans," which are easier to modify because they have only one owner.
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.
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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 banking giant also said it is 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 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 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.