The US government on Tuesday sought to put a floor under soaring home loan defaults and falling property values with a sweeping program to ease payment terms for hundreds of thousands of struggling homeowners.
The Federal Housing Finance Agency (FHFA), which temporarily took control of mortgage market powers Fannie Mae and Freddie Mac in September, announced a program to coordinate all interested parties into a streamlined approach to resetting endangered mortgages with lower interest rates and longer maturities.
The program is “designed to greatly reduce preventable foreclosures with a simplified, streamlined loan modification program to get struggling homeowners into mortgages that they can afford,” agency chief James Lockhart said.
“It is an achievable goal if homeowners, banks, mortgage servicers and investors, Fannie Mae, Freddie Mac all work together,” Lockhart said.
The move came just hours after Citigroup announced a moratorium on foreclosures of most home loans and a program to “preemptively reach out” to 500,000 of its mortgage customers — mostly in hard-hit local economies — who are not behind in their payments but require help to keep their payments up to date.
“This effort is expected to result in workouts of approximately US$20 billion in underlying mortgage balances,” the bank said in a statement.
The FHFA program brings together Fannie Mae and Freddie Mac, the Hope Now alliance of counseling agents, servicers, investors and other mortgage market participants and the Federal Housing Administration.
Fannie Mae and Freddie Mac, which the government was forced to take over after loan delinquencies skyrocketed and the market for their own debt shut down, own or guarantee almost 31 million mortgages, including roughly 58 percent of all single-family mortgages in the US.
“Although these mortgages only represent about 20 percent of serious delinquencies, I believe their [Fannie and Freddie’s] leadership role combined with the many partners of Hope Now should spread this approach throughout the whole mortgage loan servicing business,” he said.
“Foreclosures increased 150 percent over the last two years. Foreclosures hurt families, their neighbors, whole communities and the overall housing market. We need to stop this downward spiral,” Lockhart said.
Lockhart said the program would focus on home loans that are more than 90 days past due and provide incentives for institutional investors in mortgage-backed securities (MBS) that might control the loans and banks which service the loans to go along with the deal.
The modifications aim to bring the homeowner’s payments down to 38 percent of his or her income and could involve cutting the interest rate to just 3 percent and lengthening the term of the mortgage to 40 years.
Banks which service the mortgages will be paid US$800 for each successful restructuring, and investors will have to pay fees for the workouts.
Treasury assistant secretary Neel Kashkari, who is spearheading the government’s US$700 billion program to rescue banks that foundered in the US mortgage crisis, praised the program as “a standard for the industry to quickly move homeowners into long-term sustainable mortgages.”
But Democratic Senator Charles Schumer said the plan wasn’t forceful enough.
“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,” he said.
Lockhart called on the holders of mortgages and mortgage-backed securities sold by private lenders to adopt the FHFA modification model, saying that the loan default rate in private label MBS is far higher than in those issued by Fannie and Freddie.
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