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Home loan relief offered

U.S. officials hope a streamlined procedure for modifying troubled mortgages will serve as a model for lenders.

November 12, 2008|Maura Reynolds | Reynolds is a Times staff writer.

WASHINGTON — The latest government-backed effort to stem the country's soaring rate of foreclosures could help several hundred thousand borrowers keep their homes but will do little for 80% of seriously delinquent borrowers, especially in once-hot real estate markets such as California, federal officials said.

The program announced Tuesday, aimed at mortgages owned or guaranteed by government-sponsored Fannie Mae and Freddie Mac, could serve as a model for reworking the huge number of troubled mortgages packaged into securities by Wall Street and other private financial companies, federal and industry officials said.

"This new protocol will be a standard for the industry to quickly move homeowners into long-term sustainable mortgages," said Neel Kashkari, the Treasury Department's interim assistant secretary for economic rescue programs.

But critics question whether the program would have such a broad reach. And Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., acknowledged that it was far from a comprehensive solution.

"This is a step in the right direction but falls short of what is needed to achieve wide-scale modifications of distressed mortgages," Bair said.

"Given continually rising foreclosures and their impact on the economy, we must address the need for appropriate economic incentives to prevent unnecessary foreclosures."

The new initiative -- part of an industry-led assistance effort known as Hope Now -- is not intended to take the place of other programs to reduce foreclosures, including a refinancing program through the Federal Housing Administration that Congress approved last summer, and a program still being developed that was authorized by the recently enacted $700-billion rescue of the financial industry.

Under the program announced Tuesday, a homeowner who lives in the home in question and misses at least three loan payments could qualify for a streamlined workout designed to reduce the monthly payment to 38% of the borrower's gross income.

That would be accomplished by doing one or more of the following: extending the term of the loan to 40 years; lowering the interest rate temporarily or permanently; or excluding part of the loan balance when calculating the monthly payment.

With the last option, known as principal forbearance, the amount owed by the borrower would not change and would have to be paid back when the house was sold or refinanced.

The proposed modifications resemble those being undertaken by the FDIC at Pasadena-based IndyMac Bank, which the agency has been operating since the lender's failure in July.

The new program, scheduled to begin Dec. 15, is designed primarily to speed mortgage workouts. Borrowers who don't qualify would be eligible for a case-by-case review by their loan servicer.

"For those in the foreclosure process, more help is at hand," said FHA Commissioner Brian Montgomery, who estimated that several hundred thousand borrowers could get streamlined workouts.

Fannie Mae and Freddie Mac own or guarantee about 58% of all single-family residential mortgages. But because they had tougher lending standards than the industry as a whole during the housing boom, they hold only 20% of seriously delinquent mortgages.

In addition, until recently Fannie and Freddie could not own or guarantee mortgages that exceeded $417,000, well below where average prices peaked in some markets, including many areas of California.

A major obstacle in modifying mortgages has been the fact that most troubled home loans were pooled soon after they were made and were sold in the form of securities to private investors, some of whom resist making any changes to the terms of the loans.

Michael Heid, co-president of Wells Fargo Home Mortgage and an official with the Financial Services Roundtable, an industry group, said the program unveiled Tuesday would make it easier for loan servicers "to act on modifications that fully comply with investor requirements."

But Sen. Charles E. Schumer (D-N.Y.), chairman of Congress' Joint Economic Committee, said changes would be difficult to make, even with loans guaranteed by Fannie Mae and Freddie Mac.

"No amount of incentives for investors can change the fact that a program like this will only really work if Fannie and Freddie hold the whole loan, which is true in too few cases," he said.

"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."

Schumer said "the only viable solution" was to change the bankruptcy law to permit judges to rewrite the terms of unaffordable loans.

Hope Now says its members have helped 2.5 million borrowers since July 2007, but only 860,000 of them actually had the terms of their loans modified. The vast majority were given more time to make their payments.

Some mortgage lenders are taking unilateral steps to modify loans and avoid foreclosures. Banking giant Citigroup announced Tuesday that it was halting the foreclosure process for loans in its portfolio and would try to modify terms for as many as 500,000 borrowers.

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maura.reynolds@latimes.com

Times staff writer Jim Puzzanghera in Washington contributed to this report.

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