Six lenders throw seriously delinquent borrowers a lifeline

Loan mods promised as Congress weighs bankruptcy 'cram-downs'
By: Matt Carter: Inman News
Six major lenders have agreed to work with seriously delinquent homeowners, putting foreclosure proceedings on hold for up to 30 days to offer some borrowers workout plans that would lead to formal loan modifications if they can make reduced loan payments for three months.

Backers of the new initiative, Project Lifeline, say it goes beyond previous outreach efforts by lenders in that it targets borrowers who are already behind on their payments by 90 days or more and covers all types of loans, including, prime, alt-A, second-lien and home-equity loans.

Participating Project Lifeline lenders - Bank of America, Citigroup, Countrywide Financial Corp., Chase, Washington Mutual and Wells Fargo - are sending letters to seriously delinquent borrowers. Borrowers who receive the letters must call their mortgage servicer within 10 days, agree to seek financial counseling, and provide updated financial information that can be used to draw up a workout plan.

In cases where lenders think a workout may be a better alternative than foreclosure, pending foreclosures will be put on hold for up to 30 days while a review process is undertaken and a new payment plan is drawn up. Borrowers who are approved for a workout plan that lowers their monthly payments will have their loan terms formally modified if they can prove they're able to meet the new terms by making payments for three consecutive months.

Details about the Project Lifeline program were unveiled at a press conference today attended by Treasury Secretary Henry Paulson and Housing Secretary Alphonso Jackson.

Jackson used the press conference as an opportunity to renew his calls for Congress to pass an FHA modernization bill, saying it could expand Federal Housing Administration loan guarantee programs to serve 250,000 additional borrowers.

The Project Lifeline initiative comes as the lending industry tries to dissuade Congress from passing new laws that would give bankruptcy judges the power to "cram down" the monthly mortgage payments of borrowers who file for Chapter 13 bankruptcy protection by rewriting loan terms or reducing a loan's principal.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., has warned that lenders aren't engaging in workouts fast enough to slow the pace of foreclosures. A recent survey of bank loan officers by the Federal Reserve suggested that one of the biggest obstacles to engaging in workouts with borrowers will be keeping them from walking away from homes that are worth less than the balance of their mortgage. Bair said in some cases, lenders will have to start writing down principal on some loans.

Bank of America executive Floyd Robinson said that in some cases where falling home prices have left homeowners "upside down," or owing more than their home is worth, BofA would be willing to forgive part of their debt. But Robinson said he couldn't speak for other Project Lifeline lenders, and that the initiative does not establish criteria for lenders to follow in deciding whether to forgive principal.

Paulson said there will be those -- particularly those who were trying to make a profit during the housing boom -- who end up upside down, and "who just choose to walk away. This program isn't intended to deal with that."

Project Lifeline lenders, who service about half of all mortgages nationwide, said they hope the program will serve as a blueprint for other loan servicers who join the initiative. All 90-day delinquent loans serviced by Project Lifeline lenders are eligible for the program, unless they are in active bankruptcy, in foreclosure with a sale date less than 30 days away, or if the home is an investment property or vacant.

The six members participating in Project Lifeline are also members of the HOPE NOW coalition, a separate effort to speed up the process of loan modifications for subprime borrowers with adjustable-rate mortgage (ARM) loans. That program is targeted at hybrid ARM borrowers who are current on their payments but who face higher monthly payments when their introductory interest rates expire. HOPE NOW loan servicers have adopted guidelines intended to streamline loan modifications such as "freezing" the introductory interest rate on ARM loans for five years.

Members of the HOPE NOW coalition last week said that a survey of some of the group's members suggests that the lending industry as a whole made 336,000 loan modifications in 2007 and initiated 1.18 million formal repayment plans (see Inman News story).

Another survey of loan servicers published by the State Foreclosure Prevention Working Group found that in October, seven out of 10 delinquent borrowers were not on track for any loss mitigation program.

Sen. Chris Dodd, D-Conn., has proposed creating a Federal Homeownership Preservation Corp. to purchase mortgage loans at risk of foreclosure at a discount and move homeowners into 30-year fixed-rate mortgages backed by the FHA, Fannie Mae or Freddie Mac (see story).

Asked by a reporter about Dodd's proposal, Paulson rejected it out of hand, saying it was modeled after a program put in place during the Great Depression, when unemployment and mortgage default rates were much higher and programs like Federal Housing Administration loan guarantees did not exist.

"Our view here is what we've had is housing prices go up for a long time at prices that were unsustainable -- there needs to be a correction," Paulson said.

Paulson also dismissed a question by a reporter who wanted to know if there will be fewer foreclosures in 2008, and if the worst of the problems in the housing market were over.

"The worst isn't over; the worst is just beginning," Paulson said. With about 2 million subprime ARM resets yet to come, he said, "what's going on in the housing market is not over; it's going to take longer."