Government Announces Latest Effort To Stem Foreclosure Deluge

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In the latest effort to stem the tide of foreclosures, the United States government announced a streamlined loan modification program Tuesday in order to assist homeowners facing the loss of a home. Mortgages held by Government Sponsored Enterprises Fannie Mae (FNM) and Freddie Mac (FRE) are the focus of the initiative, which combines the efforts of several individual agencies.

Leaders of the respective agencies, including Interim Assistant Treasury Secretary for Financial Stability Neel Kashkari, Federal Housing Finance Agency Director & Oversight Board Chairman James B. Lockhart, Federal Housing Agency Commissioner Brian Montgomery, HOPE NOW director Faith Schwartz, and Wells Fargo director of Loan Servicing Michael Heid spoke at a press conference Tuesday.

"Today, we're announcing a major program designed to greatly reduce preventable foreclosures with a simplified, streamlined loan modification program to get struggling homeowners into mortgages that they can afford," Lockhart said.

The new guidelines allow borrowers who are at minimum three months behind on their home loans and owe over 90 percent on their home to qualify for an interest rate reduction. Their rates will be reduced to insure that the borrowers pay no more than 38 percent of their net income on housing-related expenses.

Alternately, homeowners who meet the above requirements will be allowed to extend the length of the mortgage from 30 to 40 years, reducing the monthly payment and deferring some of the principal interest-free.

Lockhart's agency, the FHFA, temporarily took control of embattled mortgage lenders Fannie and Freddie in September. Lockhart expressed confidence in stemming the tide of foreclosures under this new, united approach.

"It is an achievable goal if homeowners, banks, mortgage servicers and investors, Fannie Mae, Freddie Mac all work together," Lockhart said.

"This framework will not only help those homeowners who receive a streamlined modification, it will also further address servicer capacity concerns by freeing up resources, helping ensure that borrowers do not fall through the cracks because servicers aren't able to get to them," Kashkari added.

The program brings together the Treasury Department, the FHFA, the FHA, the Department of Housing and Urban Development, GSEs, and the HOPE NOW alliance.

Responding to the announcement, Senate Banking Committee chairman Christopher Dodd called the concerted effort a "constructive step forward" if not a delayed action.
"This is a constructive step forward," the Connecticut Democrat said in a statement. "However, I regret that the industry did not take it much, much earlier when it might have done more to stem the overwhelming tide of foreclosures ravaging our neighborhoods and forcing thousands of American families from their homes."
In addition, Dodd noted that the initiative should not be considered a replacement for the guarantee program in the $700 billion financial rescue plan.
"We are still awaiting agreement from the Treasury Department to move this program forward, despite indications given to me weeks ago that an agreement was imminent," Dodd said. "I have been in contact with both Secretary Paulson and Chairman Bair on this issue, and I intend to keep pushing for more aggressive and effective action."
Fannie and Freddie currently own or guarantee nearly 31 million mortgages, Lockhart noted, making up nearly 60 percent of all single-family mortgages in the U.S. He added that although Fannie and Freddie owned or guaranteed mortgages only make up around 20 percent of serious delinquencies, the streamlined approach could set an example for the rest of the mortgage loan service business that holds the remaining 8 out of 10 delinquencies.

"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.

Kashkari praised Lockhart as well as Fannie and Freddie for "taking the lead in developing and adopting this streamlined approach to loan modifications and helping establish these important new industry standards."

The streamlined approach will go into effect on December 15th and, according to Kashkari, "will be a standard for the industry to quickly move homeowners into long-term sustainable mortgages."

"This is a constructive step forward. However, I regret that the industry did not take it much, much earlier when it might have done more to stem the overwhelming tide of foreclosures ravaging our neighborhoods and forcing thousands of American families from their homes. Moreover, this should not be considered a replacement for the guarantee program authorized by the recently-enacted financial rescue law which the FDIC has agreed to operate. We are still awaiting agreement from the Treasury Department to move this program forward, despite indications given to me weeks ago that an agreement was imminent. I have been in contact with both Secretary Paulson and Chairman Bair on this issue, and I intend to keep pushing for more aggressive and effective action."
John A. Courson, Chief Operating Officer of the Mortgage Bankers Association also praised the action, calling the modification program "yet another critical tool" that mortgage servicers will have as they continue to stem the tide of foreclosures..

"Over the past year, mortgage servicers have drastically accelerated their efforts to reach out and help borrowers who are having trouble paying their mortgage," he said in a statement. It has always been in the industry's best interest to help the homeowner avoid foreclosure. The SMP is yet another critical tool that mortgage servicers will have at their disposal as they work to keep more of America's homeowners in their homes."

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