Mortgage giants Fannie Mae or Freddie Mac may back 30 million mortgages. But that doesn’t mean that the new foreclosure prevention program announced this week by the Bush administration will rescue every troubled borrower on their books.

The Federal Housing Finance Agency (FHFA), which took control of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) in September, together with Hope Now, the coalition of lenders, servicers, investors and community groups, designed the plan to help some of the most at-risk homeowners.

“Foreclosures hurt families, their neighbors, whole communities and the overall housing market,” said James Lockhart, director of FHFA in a release. “We need to stop this downward spiral.”

The plan, which begins on Dec. 15, is open to borrowers with loans owned or backed by Fannie and Freddie who are at least 90 behind with their mortgage payments. But in reality, qualifying for the program will probably be a lot more complicated than meeting these two requirements. In the end, it’s probable that only a relatively narrow swath of people will benefit from the initiative.

About 1.22% of Freddie’s 12 million loans are 90 days or more late, while 1.7% of Fannie’s 18 million loans are that far past due. That’s a total of more than 450,000 borrowers, however it’s unlikely that all or even most of them will get help.

“Some people may be technically eligible but not practically eligible,” due to factors like an extremely low income, according to Keith Gumbinger, of mortgage research firm HSH Associates. “I wish someone would get a clear handle on how many people it could actually help,” he said.

Who gets help

Fannie and Freddie are only targeting homeowners who are more than three months past due on their loans in order to ensure that the most troubled borrowers get help immediately.

Beyond that, borrowers will have to write what’s called a “hardship letter” to illustrate that they fell behind for a good reason - whether it’s a a job loss, divorce or a medical problem. If they can’t show that, they don’t get a fix.

Another condition: Borrowers cannot have too much equity in their homes. If their home’s current market value exceeds their mortgage balance by more than 10%, they’re considered too well off to participate. Instead, these borrowers have the option to tap that home equity, either by refinancing or taking out a home equity loan, to get current with their payments.

And some borrowers are simply too far gone to help according to Brad German, a spokesman for Freddie Mac. Those with a mountain of debt and little income may need a much more drastic modification than any lender would be prepared to issue.

“Borrowers have to have some income,” said Faith Schwartz, director of Hope Now. “The property has to [provide] cash flow somehow for the lender.”

But Schwartz cautions that even borrowers in very bad shape should contact their lenders. They may not qualify for a loan workout, but a bank may be willing to do a short sale or a deed in lieu of foreclosure. In a short sale the lender agrees to let the borrower sell the property for less than what the mortgage is worth and forgive the difference. In a deed in lieu of foreclosure the borrower essentially gives the house back to the bank.

Either of these options will do a lot less damage to a borrower’s credit score.

Finally, not everyone who could benefit from the program will chose to participate. Surprisingly, many borrowers who are in trouble just don’t do anything; they don’t contact their banks and they ignore their lender’s phone calls and letters.

Although the program may not have a massive impact, according to Schwartz it’s still a welcome supplement for the many other plans - FHA Secure, Hope for Homeowners and programs from individual lenders - already in place.

And officials hope that it will provide an easy-to-apply template for other modification programs.

“It’s an important step forward for the industry to establish clear-cut guidelines, that make it easier for servicers to act on modifications and for borrowers to understand what is involved,” said Schwartz.

How it works

Lenders will look at their portfolios for borrowers who qualify, and then send out letters informing them that help is available and asking the borrowers for financial information, such as pay stubs and bills, as well as hardship letters.

Then the banks will use that information to determine if they can keep a borrower in their home by reducing their monthly payment to no more than 38% of their gross income. To do that, they can lower interest rates to as little as 3%, extend the length of the loan or defer some of the loan principal.

“The big thing is reaching the agreed-upon affordability target [of 38% of income],” said Schwartz. “However you have to get there to solve the mortgage delinquency by hitting that benchmark, that’s what you do.

After borrowers complete their workout and make three payments at the lower level, the fix becomes permanent.

Schwartz urges at-risk borrowers to call their lenders as soon as possible rather than waiting for the Dec. 15 start date. The longer borrowers wait, the more they fall behind on their payments, the harder it is to help them.

“We should not discourage anyone from contacting their lenders for help,” she said.

Even if you don’t qualify for this plan, there may be another way your lender can help you, she added. It never hurts to ask.

Credits: CNNMoney.com

Mortgage rates fell for the second week in a row, finance firm Freddie Mac said Thursday, as the weakening economy resulted in the slowest pace of home purchase applications in nearly eight years.

Freddie Mac said 30-year fixed-rate mortgages averaged 6.14% this week. That’s down from 6.20% last week and below the 6.24% rate at this time last year.

Rates for 30-year fixed-rate mortgages have been at 6% or higher for five consecutive weeks. Between the week of Oct. 9 and Oct. 16, the 30-year fixed-rate mortgage posted its biggest weekly jump since April 1987, rising from 5.94% to 6.46%

“Long-term mortgage rates fell slightly this week as signs the overall economy is weakening brought interest rates down market-wide,” according to a statement by Frank Nothaft, Freddie Mac vice president and chief economist.

Rates on 15-year fixed-rate mortgages fell to 5.81% from 5.88% last week. A year ago, the rate was 5.88%.

The five-year adjustable-rate mortgage fell to 5.98%, from 6.19% last week. A year ago, the rate was 5.96%.

The rate on a one-year adjustable-rate mortgage rose to 5.33% from 5.25% last week. At this time last year, the rate was 5.50%.

Mortgage applications for home purchase loans fell during the last week in October to the slowest pace since the week of Dec. 29, 2000, according to data from the Mortgage Bankers Association.

On Thursday, the head of the Senate Banking Committee said banks receiving money as part of the $700 billion federal bailout must increase their lending to businesses and consumers.

Banks are failing to use public funds to make credit more available and to help troubled homeowners, said Sen. Christopher Dodd, D-Conn.

A recent survey of senior loan officers from the Federal Reserve found that about 70% of banks raised their lending standards for prime mortgages, and about 90% of banks that offer nontraditional mortgages did so as well.

In September, Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) were on the brink of failure, having racked up nearly $12 billion in losses from declining home prices, mortgage delinquencies and foreclosures.

Federal officials assumed control of the firms and the $5 trillion in home loans they back. The Treasury put up as much as $200 billion to bail them out and placed them in a temporary “conservatorship” overseen by the Federal Housing Finance Agency.

Credits: CNNMoney.com

As government and industry scrambled to stem the housing crisis, another 84,868 homes were lost to foreclosure in October, according to a report released Thursday.

Last month 279,561 struggling borrowers received foreclosure filings, including default notices, notices of auction sales and bank repossessions, according to RealtyTrac, an online marketplace for foreclosures. That’s a 5% increase from September, and up 25% from October 2007.

“October marks the 34th consecutive month where U.S. foreclosure activity has increased compared to the prior year,” said James J. Saccacio, chief executive officer of RealtyTrac in a statement.

A total of 936,439 homes have been lost to foreclosure since the housing crisis hit in August, 2007.

Foreclosures hit a record high in August when 304,000 homes were in default and 91,000 families lost their houses. Since then, a number of states have adopted legislation to freeze foreclosures and give homeowners a chance to modify their mortgages. These laws have helped slowed the rate of foreclosures.

“The really sobering reality for us is that despite these various state programs that are artificially keeping the numbers down, we are still up 25% from a year ago,” said Rick Sharga, Senior Vice President of Realty Trac.

Making matters worse is the rapidly deteriorating economy, says Global Insight economist Pat Newport.

“It seems almost every day you hear about another company planning further layoffs,” he said. When people lose their jobs, they can’t make mortgage payments.

And while some homeowners are defaulting because they’ve fallen on hard times, Newport says that others have simply stopped paying their mortgages. “Falling home prices are providing an incentive for them to walk away from their homes simply because it just isn’t worth it,” he said.

Home prices have been on a steep decline, with 20 major markets plunging a record 16.6% year-over-year in August according to the most recent data fromCase-Shiller. That index has recorded declines for 25 consecutive months.

State legislation: A a new law in California, one of the hardest-hit states in the housing crisis, requires banks to contact struggling homeowners 30 days before delivering a notice of default, to give them time to restructure their plans.

Thanks to that legislation, foreclosures in the state fell 18% from September. But California still had the highest number of foreclosures in the country for October, logging 56,954 filings. That total was down from a peak of more than 100,000 filings in August, but up 13% from October 2007.

Clearly the housing crisis is not relenting. “While the intention behind this legislation - to prevent more foreclosures - is admirable,” said Saccacio, “without a more integrated approach that includes significant loan modifications, the net effect may be merely delaying inevitable foreclosures.”

The delays may also be masking the problem, he said. “The apparent slowing of foreclosure activity understates the severity of the foreclosure problem in these states,” Saccacio said.

Nevada had the highest rate of foreclosures of any state for the twenty-second consecutive month in October, with one in every 74 housing homes receiving a foreclosure filing. Arizona had the second highest rate in October, with one in every 149 housing units in default. Florida was third, with one in every 157 homes there in default.

Banks, government step up: Both government agencies and a handful of major lenders have recently introduced new foreclosure prevention programs, but it will take a while before they have an impact.

“It took us the first half of the decade to get into this problem,” said Sharga, “so it is probably going to take a couple of years to get out.”

On Tuesday the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), unveiled a new program to help eligible borrowers stay in their homes by lowering their monthly payments to 38% of gross household income.

And on Monday Citgroup (C, Fortune 500) announced the Citi Homeownership Assistance Program, which it says will modify $20 billion worth of loans for 130,000 borrowers. Similar housing rescue initiatives were unveiled recently by FDIC-controlled IndyMac Bank, which says it will help as many as 40,000 homeowners, as well as Bank of America (BAC, Fortune 500), which estimates it can rescue 630,000 homes and JPMorgan Chase (JPM, Fortune 500), which expects to help another 400,000 families.

The moves are promising. “This is finally a step in the right direction,” said Sharga. “Those are the kind of programs we need to see executed to see the number of foreclosures slow down.”

Hurdles remain, including home loans that will be much harder to modify because they’ve been packaged and securitized into investments.

And Sharga notes that fixing existing loans is only part of the equation; banks must resume lending to new borrowers. “Just freeing up some funds for qualified home buyers would make a huge difference in getting the housing market back on its feet,” he said.

Mike Larson, a real estate analyst with Weiss Research, added that falling home prices and the slowing economy will also create strong headwinds for any government relief program.

“You can certainly fix some of these mortgages, you can certainly try to slow the foreclosures,” said Larson, “but until home prices stabilize and the economy gets back on its feet, it is going to be a tough slog.”

Credits: CNNMoney.com

Rep. Barney Frank, chairman of the House Committee on Financial Services, highlighted the need for a bailout program for troubled homeowners on Wednesday. But he stressed that not all borrowers should necessarily be rescued.

“Diminishing foreclosures is an important part of getting out of this [financial crisis],” said Frank, D-Mass., in an opening statement at a Congressional hearing on bank rescue plans for homeowners facing foreclosure.

But Frank added that taxpayer money should not be used to give anyone a “free ride,” and warned that aid should not go to homeowners who never could have afforded their mortgage to begin with.

“There is, in my judgment, zero likelihood that taxpayer dollars will go to those who should never have had loans in the first place,” Frank said.

Several major banks have recently launched programs to assist homeowners in danger of foreclosure.

On Tuesday, Citigroup (C, Fortune 500) said it would expand its Citi Homeownership Assistance Program in an effort to keep 130,000 troubled borrowers with mortgages worth $20 billion in their homes. The plan is similar to programs outlined by IndyMac Bank, which was taken over by the Federal Deposit Insurance Corp. this summer, as well as Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500).

IndyMac launched a program in August to help 40,000 borrowers. JPMorgan has sad that it hopes to assist 400,000 homeowners by modifying loan terms or payments. Today, Bank of America said that it expects its housing rescue plan will help 630,000 troubled customers, a figure that is revised upward from its original estimate of 400,000.

The hearing featured testimony from Michael Gross, managing director of loan administration loss mitigation for Bank of America, and Molly Sheehan, senior housing policy advisor in the home lending division for JPMorgan Chase. Both executives detailed changes they are making to their workout plans.

Sheehan said JPMorgan Chase will “systematically review its entire mortgage portfolio” and proactively offer interest-rate reductions and other financing options to homeowners. The bank will also establish 24 new regional counseling centers in areas with high mortgage-delinquency rates.

JPMorgan Chase also intends to add 300 more loan counselors, bringing its total to 2,500. Sheehan said JPMorgan will “create a separate and independent review process with Chase to examine each mortgage before it is sent into the foreclosure process.” Finally, she said, no additional loans will start the foreclosure process for 90 days, during which time the outlined changes will be implemented.

Gross said Bank of America is implementing a “proactive loan modification process” to provide relief to homeowners who are “seriously delinquent,” representing roughly $100 billion worth of mortgages. This includes refinancing under the Hope for Homeowners program and interest rate reductions. The bank is also considering principal reductions on pay-option and adjustable rate mortgages in order to restore lost equity, Gross said.

Gross said that, through October of this year, loan modifications accounted for 75% of Bank of America’s mortgage workouts, while repayment plans accounted for 12%. Loan modifications, which make the terms of a loan more affordable, are generally considered to be a much more effective means of keeping people in their homes than repayment plans, which simply give borrowers more time to make their original payments.

Tom Deutsch, deputy executive director of the American Securitization Forum, told the committee that while corporate foreclosure prevention efforts are critical to turning the market around, they “are not a panacea” for fixing the problem. He said he sees more work for the government ahead.

“In addition to expanded industry efforts, federal government initiatives such as Hope for Homeowners and the Troubled Asset Relief Program will have to be even more aggressive in their efforts to stabilize homeownership, neighborhoods and communities around the country,” said Deutsch.

He added that expected housing prices to continue to decline throughout 2009 in “some of the more troubled markets,” including California and Florida.

Borrowing a line from former Federal Reserve chairman Alan Greenspan, Deutsch blamed “irrational exuberance” for the imploded housing market, in addition to the economic downturn.

But even with these plans in place, Mark Zandi, chief economist for Moody’s Economy.com, estimates that 1.6 million Americans will lose their homes this year through foreclosure or distressed sale. Zandi, who was not at the hearing, said that another 1.9 million families will lose their homes in 2009.

The federal government’s plan to streamline modifications of troubled loans held by Fannie Mae and Freddie Mac won’t help the majority of people threatened with foreclosure, experts said.

Under a plan unveiled Tuesday, homeowners whose loans are owned or backed by the mortgage finance companies and who are at least 90 days behind can enter a streamlined modification program. Their payments would be adjusted through lower interest rates or longer repayment terms that would total no more than 38% of their monthly household income. In some cases, payment on part of the loans’ principal may be deferred, though not reduced.

The interest rate could be lowered to as little as 3% for five years. After that, it would increase by 1 percentage point a year until it hits either the market rate or the original interest rate, whichever is lower, officials said.

Unlike previous federal efforts, participation by servicers is not voluntary. They will now work with eligible borrowers to reach more affordable mortgage payments, using the guidelines laid out Tuesday.

Also, officials hope the new program, which could help more than 400,000 homeowners, will convince servicers who handle loans held by private investors to follow suit.

Program doesn’t cover most subprime loans

While experts and some government officials called the plan a positive step forward, they said much more needs to be done to address the mortgage crisis. The program does not address the heart of the problem — troubled loans held by private investors.

Though Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) own or guarantee 58% of all mortgages on single-family homes, these loans represent only 20% of serious delinquencies. The majority of the problem mortgages were bundled into securities, which were sold in pieces to investors.

“This is a step in the right direction but falls short of what is needed to achieve widescale modifications of distressed mortgages, particularly those held in private securitization trusts,” said Federal Deposit Insurance Corp. chairman Sheila Bair, who has proposed an alternate plan addressing securitized loans. “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.”

Problems in the mortgage market remain concentrated in the subprime sector, which are mainly held by investors who have resisted modifying the loan terms.

“Most foreclosures are happening on subprime loans that Fannie and Freddie don’t control,” said Eric Stein, senior vice president at the Center for Responsible Lending, which has long pressed the federal government to help delinquent borrowers. “More is still needed to address foreclosures on these mortgages. To date, voluntary modifications haven’t been sufficient. That’s why we still have a foreclosure crisis.”

To broaden existing foreclosure fixes, Bair supports using up to $50 billion of the $700 billion financial sector rescue plan to guarantee modified loans. This would give servicers an incentive to adjust the loan terms and could help up to 3 million homeowners, though the number is not firm.

Meanwhile, the FDIC has already adopted a streamlined process to modify troubled loans owned or serviced by the failed IndyMac Bank, which the agency took over in mid-July. Some 3,500 borrowers have accepted the workouts, which also aim to keep payments at no more than 38% of gross income.

Several major servicers — including Bank of America, JPMorgan Chase and Citigroup — have recently announced expansions of their foreclosure prevention efforts, which could aid nearly a million more borrowers.

The programs will also seek to make payments more affordable by cutting interest rates or stretching out loan terms, but some homeowners can also get their mortgage principal reduced depending on their servicer and financial situation.

Deferring payment on principal

Reducing principal is key to keeping some borrowers — especially those whose house values have fallen below their mortgage balances — in their homes, experts said. It makes both the loan more affordable and gives homeowners more incentive not to walk away.

In announcing the plan, officials made a point of saying that borrowers must repay their current mortgage in full, just with more affordable monthly payments.

“Loan modifications are not a gift … the principal cut on the front end will be paid at the end of the loan, either in extended payments or a balloon payment,” said Brian Montgomery, commissioner of the Federal Housing Administration. “This is not loan forgiveness.”

However, to make payments affordable, servicers may choose to defer part of the payment — with no interest — until the end of the loan, officials said. For borrowers whose homes are worth less than their mortgages, servicers might defer the difference.

Here’s how it would work: Let’s say a homeowner has a $200,000 mortgage on a house now worth $150,000. The servicer may defer payment on $50,000 of principal. If the home recovers its value and the borrower sells it, he or she would have to pay back the deferred amount at that time. If it doesn’t recover, the borrower would have to work out a deal with the servicer, likely a short sale, in which the bank forgives the difference between the sale price and the mortgage balance.

If the borrower stays in the home, he or she would have to pay the deferred amount within 30 days of the last payment, likely 30 or 40 years from now. Homeowners could take out a new mortgage to cover that balloon payment.

Setting industry standards

Officials hope that Fannie and Freddie’s influence in the mortgage market will prompt servicers working with private investors to use this streamlined procedure in their own modifications. Often, investors defer to the mortgage finance agencies to set the methodology.

“I ask the private label mortgage-backed securities servicers and investors to rapidly adopt this program as the industry standard,” said James Lockhart, head of the Federal Housing Finance Agency, which oversees Fannie and Freddie. “Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values.”

Credits: CNNMoney.com