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How Fannie and Freddie Are Trying to Stem Foreclosures

In a bid to break the impasse over how to rapidly restructure overdue home loans, the federal government on Tuesday announced a new plan that allows some homeowners to rewrite their mortgages so that they won’t have to pay more than 38 percent of their monthly income toward housing.

Starting Dec. 15, Fannie Mae and Freddie Mac, the mortgage finance giants now controlled by the federal government, will modify loans for borrowers who have missed three or more payments, own and occupy the home as a primary residence and have not yet filed for bankruptcy. More than a quarter of all delinquencies affect homeowners over the age of 50, according to AARP research. 

The loan modifications could include lowering the interest rate of the mortgage, deferring some of the principal owed or extending maturities to as much as 40 years, officials said. A borrower needs to submit a hardship statement and financial records.

Fannie Mae and Freddie Mac may well have significant influence in the housing finance market because they own or guarantee almost 31 million mortgages, nearly 60 percent of all single-family mortgages. But those mortgage loans tend to be conventional, or “conforming,” loans rather than the subprime loans that are at the heart of the current foreclosure crisis.

For this reason, critics immediately pointed out that the new proposal won’t help a huge number of so-called subprime borrowers facing foreclosure because their home values have collapsed and their payments on mortgages have exploded.

“This is a step in the right direction but falls short of what is needed to achieve wide-scale modifications of distressed mortgages,’’ Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said in a statement. The new package, she noted, won’t fix “the front-end problem: too many unaffordable home loans.”

The announcement by James Lockhart, head of the Federal Housing Finance Agency (FHFA), which now operates Fannie and Freddie, came only a few hours after Citigroup Inc. said it will modify mortgage terms for as much as $20 billion in mortgages for borrowers who are current on their loan payments but at risk of falling behind.

JP Morgan Chase, which acquired the troubled loan portfolio of Washington Mutual, and Bank of America, which took over Countrywide Financial, have also announced new programs to modify mortgages.

“Foreclosures have increased almost 150 percent from two years ago,” Lockhart said at a press conference called on the Veterans Day holiday Tuesday. “We need to stop this downward spiral.”

Officials said they hoped the FHFA announcement would encourage other mortgage servicers to speedily restructure their troubled loans along similar terms. “I ask the private label servicers and investors to rapidly adopt this program as the industry standard,” Lockhart said, noting that private firms hold 60 percent of subprime delinquencies.

Roughly 1.5 million homes were in foreclosure at the end of the first half of 2008, and economists expect more borrowers to default in the coming months as unemployment rises and home values fall even farther.

Susan Wachter, a professor of real estate at the Wharton School of Business in Philadelphia, said that hundreds of thousands of potential borrowers might be helped by the new loan modification program, but warned that “it doesn’t address the borrowers who are really in trouble, those who have taken these private-label mortgage backed securities,” which aren’t underwritten by Fannie or Freddie.

“These mortgages are still locked up,” she told CNBC. “These are the majority of loans that are not performing, and we must address those as well.”

Michael Zielenziger, author of “Shutting Out the Sun”, writes on the economy. He is based in Oakland, Calif.


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