Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, will accelerate anti- foreclosure efforts by streamlining loan modifications to lower monthly payments for more struggling homeowners.
Fannie and Freddie, operating under a government conservatorship, will target loans in which borrowers are at least 90 days delinquent and have high loan-to-income ratios, officials from the Treasury and the Federal Housing Finance Agency said today at a press conference in Washington. The companies may offer homeowners reduced interest rates and longer terms of as much as 40 years to trim monthly payments.
``With such broad adoption, this new protocol will be a standard for the industry to quickly move homeowners into long- term sustainable mortgages,'' Neel Kashkari, the Treasury's interim assistant secretary, said in a prepared statement.
The initiative expands efforts by the Hope Now Alliance, a group of investors, advocacy groups, and mortgage lenders and servicers such as Citigroup Inc. and Wells Fargo & Co. that Treasury Secretary Henry Paulson helped create last year. The success rate in the past for ``curing'' delinquent loans with modifications similar to what the government proposes was about 50 percent for both prime and subprime borrowers with damaged credit, according to data from the Mortgage Bankers Association.
``We realize a number of these can't be saved because of the borrower's situation,'' said MBA Chief Economist Jay Brinkmann. ``But if we can save half of them, that's a good result.''
A Central Role
California, Florida and other high-cost real estate markets where borrowers have larger debt loads or nontraditional mortgages will likely reap the most from the program, he said.
U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record as home prices fell and stricter mortgage standards made it harder for homeowners to sell or refinance, RealtyTrac, a provider of real estate data based in Irvine, California, said on Oct. 23.
Paulson has said a housing market recovery is central to the economy's revival and urged Fannie and Freddie to play a bigger role.
``If housing doesn't get stabilized, it's really going to continue to bleed the economy,'' said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, and Bloomberg's most-accurate economic forecaster for 2008.
Under the proposal, mortgage servicers will work with borrowers to reduce monthly payments to 38 percent of their gross income, a threshold of affordability, by lowering the principal, reducing interest rates and extending the length of the loan term. The plan doesn't include money from the Treasury's $700 billion bank rescue and isn't mandatory for companies that received federal aid.
Conditions and Fees
Homeowners that qualify will receive notices about the program. Their loan modifications won't become final until they have made three consecutive payments, and there is no limit to the number of times a loan can be modified. The new payment will include all of the borrower's monthly housing costs, such as taxes and condominium payments.
Fannie and Freddie are paying mortgage servicers $800 to process each modification, which isn't available for investment or vacation properties. Fannie and Freddie will absorb the losses on loans or mortgage securities they own while investors in mortgage bonds guaranteed by the government-run corporations will bear a brunt of the losses on that debt.
``This idea is really to keep homeowners in their homes,'' FHFA Director James Lockhart said in an interview with Bloomberg Television today.
``If we can start stabilizing the mortgage market, prevent foreclosures, hopefully, we can put a floor under house prices, and that would be important to every homeowner in this country.''
Federal Deposit Insurance Corp. Chairman Sheila Bair, who has advocated using some of the money from a $700 billion bank rescue program to help with loan modifications, said today's announcement doesn't go far enough.
``This is a step in the right direction but falls short of what is needed to achieve widescale modifications of distressed mortgages,'' Bair said in a statement sent by e-mail. ``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 said there are still questions about implementation including:
Allowing extended amortization prior to interest rate reductions; the length of caps on payment increases, interest rate caps; and compliance reporting, according to the statement.
Lockhart placed Fannie and Freddie under federal control Sept. 6 and has since pushed the new management to work harder than the old management at modifying troubled single-family and multifamily mortgages to curtail foreclosures.
Fannie and Freddie's loss mitigation efforts so far have fallen short, according to a FHFA report last month. Fannie and Freddie's success in resolving delinquencies fell in the second quarter, the companies took on fewer loan modifications and workout plans for borrowers, and their success for loans in loss mitigation declined to a 37.2 percent rate from 43.7 percent in the first quarter, FHFA data shows. Company executives estimated about 10,000 borrowers a month may qualify for the new program.
FHFA and the Treasury have put more pressure on the lending industry to be flexible with struggling homeowners. The U.S. housing slump may extend into a fourth year as banks still turn away borrowers, foreclosures worsen the glut of unsold homes and job losses climb higher.
Lower property values will keep eroding home equity, complicating even more refinancings. The S&P/Case-Shiller home- price index of values in 20 U.S. cities dropped 16.6 percent in August from a year earlier, the fastest pace on record. The index has been lower every month since January 2007.
The worsening economic slump means there's a need to scrutinize past loan-modification programs and see how they can be improved, said Mary Coffin, executive vice president of loan servicing at Wells Fargo, the largest U.S. mortgage servicer.
``We didn't have the economic situation we have today 18 months ago, so we've got to re-look at it, and say, `What's the best decision for investors, borrowers and the state of the entire country?''' Coffin said in an interview at a Securities Industry and Financial Markets Association conference yesterday in New York.
(c) Bloomburg. By Dawn Kopecki and Rebecca Christie. 11/11/2008
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