Efforts expand to help financially distressed homeowners

Two mass-market loan modification programs are aimed at preventing foreclosures. But critics say they don't solve the problem and could have a corrosive effect on borrowers.
By: Kenneth R. Harney: latimes.com
You may have seen headlines about the latest public and private efforts to help financially distressed homeowners cope with their mortgage payments. But you might not have caught key details that could affect you or people you know - now or in the recession months ahead.

One of the most ambitious mass-market loan modification programs was outlined Nov. 11 by the Federal Housing Finance Agency - overseer of Fannie Mae and Freddie Mac - along with the 33 banks and mortgage servicers that make up the private-sector Hope Now Alliance.

The program, scheduled to start nationwide Dec. 15, is aimed at thousands of subprime mortgage holders and other borrowers who are three months or more behind on their payments and slipping fast toward foreclosure. To be eligible for intervention, homeowners need to document that they can handle mortgage payments of as much as 38% of their monthly gross income.

They also need to demonstrate that they have experienced some form of financial reversal that made them delinquent on their payments and prove that they did not intentionally go into default just to get better terms.

If they can pass through these hoops, borrowers may qualify for reduced interest rates, deferrals of principal payments or extended loan terms - whatever combination it takes to get them an affordable payment with their current income.

Even though the formal kickoff isn't until next month, participating lenders say they want to hear as soon as possible from potential beneficiaries. If homeowners can't connect directly, they can work through the Hope Now Alliance (www.hopenow.com) or the U.S. Department of Housing and Urban Development (www.hud.gov/foreclosure). Hope Now also has a toll-free hotline - (888)995-4673 - staffed by counselors.

The same day that the new federally assisted mass-modification effort was announced, one of the largest lenders and servicers, Citigroup Inc., unveiled a program designed to catch at-risk homeowners before they fall behind.

Citigroup will reach out to an estimated 500,000 mortgage customers who are not delinquent but who appear to be at risk - either because their credit files show signs of financial stress or because their homes are in markets that Citigroup believes face serious economic strains and job losses in the coming year.

The bank said it expected to complete as much as $20 billion in "preemptive" mortgage modifications in the next six months using rate reductions, term extensions and even reductions in principal debt balances in select situations. Citigroup also intends to halt foreclosures during the coming months for owners who have sufficient income to handle modified monthly loan payments at some level and are working in good faith with the bank to save their houses.

Although the two new programs target different segments of homeowners - the walking wounded and those heading for the line of fire - both make use of a streamlined, formula-based systematic approach for mass modifications advocated by FDIC Chairwoman Sheila Bair.

Most mortgage industry executives and economists believe the foreclosure crisis is so serious that only wholesale remedial approaches can prevent home losses from piling up. But not everyone agrees with the new programs or the loan modification options they offer to homeowners.

For example, some experts are critical of the government's requirement for three months of delinquency, contending that it could have corrosive effects on borrowers who are straining to keep up with payments but still making them on time.

Other critics say mass-market modifications are bound to produce high rates of recidivism - essentially waves of remodifications or foreclosures in the coming years as homeowners with hastily modified mortgages find that they cannot afford even those lower rates and better terms. That simply pushes the problem down the road, rather than solving it.

Bottom line for borrowers: Definitely pursue a loan modification if you qualify and need one. But talk with your servicer to make sure that the revised terms you're signing up for are realistic for your economic situation and not likely to be just a temporary patch.

Harney is a syndicated columnist for the Washington Post Writers Group.