The US government Tuesday announced a sweeping program to ease payment terms for hundreds of thousands of homeowners struggling to service mortgages held by home finance giants Fannie Mae and Freddie Mac.
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," said James Lockhart, director of the Federal Housing Finance Agency, which temporarily took control of struggling Fannie Mae and Freddie Mac in September.
"It is an achievable goal if homeowners, banks, mortgage servicers and investors, Fannie Mae, Freddie Mac all work together," Lockhart said.
He said the loan modification program aims to widen and speed up the adjustment of home loans to stifle the growth in delinquencies and foreclosures in the US housing industry.
The program brings together his agency, Fannie Mae and Freddie Mac, the Hope Now alliance of counseling agents, servicers, investors and other mortgage market participants, and the Federal Housing Administration.
Lockhart noted that Fannie Mae and Freddie Mac own or guarantee almost 31 million mortgages, including roughly 58 percent of all single-family mortgages in the United States.
"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.
According to Lockhart, the program will focus on home loans that are more than 90 days past due.
The modifications will aim at bringing the homeowner's payments down to 38 percent of his or her income, and could involve cutting the interest rate to just three percent and lengthening the term of the mortgage to 40 years.
Borrowers will have to show that they can make payments for 90 days before the loan modification is formally confirmed.
The deal includes incentives to the banks which service the mortgages, 800 dollars for each successful restructuring. And investors who bought the mortgages will have to pay fees for the workouts.
Lockhart called on the holders of mortgages and mortgage-backed securities (MBS) 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.
"Private label securities represent less than 20 percent of the mortgages but 60 percent of the serious delinquencies," he said.
"I ask the private label MBS services and investors to rapidly adopt this program as the industry standard."
The move came hours after banking giant Citigroup announced its own expanded mortgage workout program and a moratorium on foreclosures for most home loan borrowers.
The US banking giant said that over the next six months it would "preemptively reach out" to 500,000 of its mortgage customers who are not behind in their payments but require help to keep their payments up-to-date.
The effort will focus on areas of the country where local economies and home markets are facing extreme difficulties.
"This effort is expected to result in workouts of approximately 20 billion dollars in underlying mortgage balances," the bank said in a statement.
