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Lenders Embrace Workouts for Struggling Homeowners

Private actions supplement Fannie Mae, Freddie Mac streamlining

By Mark Huffman
ConsumerAffairs.com

November 11, 2008

Living in a Bubble? Mortgage Crisis? Act Now to Avoid Foreclosure • Avoiding Foreclosure Takes More Than Hope --- • Consumers Fall Further Behind in Payments • House Democrats Seek Bankruptcy Rule Changes • Pending Home Sales Post Record Drop • Home Prices Plunge in October • Navigating the Mortgage Modification Maze • Mortgage Rates Reach 37-Year Low • Boomers Facing Tough Social Security Choices • Is It Safe to Buy a House? • Mortgage Modification Meltdown • Mortgage Defaults Still Rising • Mortgage Rates Take Another Sudden Drop • Fed Slashes Rates to Near Zero • Consumer Prices Plunge in November • Home Values May Fall More in 2009 • Americans' Net Worth Plunges Nearly $3 Trillion • Surge in Mortgage Applications Doesn't Last • Pending Home Sales Slide in October • Get Your Mortgage Rate Lock Ready • Modifying Mortgages Isn't Slowing Default Rate • Mortgage Delinquencies, Foreclosures Surge • Mortgage Applications Surged 112 Percent Last Week • GAO Calls for Better Bailout Oversight • Homes Lose More Value In Third Quarter • Home Prices Post Record Decline • Fed Throws $800 Billion Lifeline to Consumers • Existing Home Sales Drop in October • When in Doubt, Leave Nothing Out • Fannie Mae and Freddie Mac Suspend Foreclosures • Consumer Prices Plunge in October • Paulson Rejects Bailout Money for Detroit • Another Glimmer of Hope in The Housing Market • Buyers' Beware Market • FDIC Backs More Aggressive Loan Modification Plan • Housing 2009 Forecasts Mixed, But Mostly Grim • Foreclosures Up Five Percent in October • Feds Shift Gears On Bailout, Puts Focus On Consumers • More Homeowners Under Water in Third Quarter • Feds Mount New Effort to Help Struggling Homeowners • Lenders Embrace Workouts for Struggling Homeowners • Obama Can't Quickly Raise Homebuyers' Hopes • At Last: Bailout Trickling Down to Struggling Homeowners • New Home Sales Rise in September • How to Appeal Your Property Tax Bill • Existing Home Sales Rise in September • Administration Considers More Help for Homeowners • Foreclosure Activity Drops in September • Southern California Home Sales Surge 65 Percent in September • HOEPA: New Hope for Outlawing Abusive Mortgages • FDIC Chief: Not Enough Help for Homeowners --- • More ...

For the first time, there appears to be a concerted effort among major lenders to help struggling homeowners avoid foreclosure by altering the terms of their loans.

The action supplements a federal plan to streamline loans held by Fannie Mae and Freddie Mac.

The private lenders' "workout" agreements are seen by many housing industry analysts as a key step in containing the foreclosure avalanche and bringing stability back to the housing market.

Citigroup has announced it is placing a moratorium on foreclosures so that it can spend the time needed to analyze situations on a case-by-case basis. If the homeowner meets certain criteria, the bank says, it may offer new terms.

For example, if the home in question is a principal residence and not an investment property, the bank will consider a workout arrangement.

In addition, the borrower will have to work with the bank in good faith and have enough steady income to make reduced payments. If those conditions are met, the interest rate might be changed to as low as one percent for up to two years.

In some cases, homeowners could have the principal of the loan reduced and the term of the loan increased, in order to make the payments more affordable.

Bank of America, which now owns Countrywide Financial, JPMorgan Chase and others have also announced plans to move more aggressively to help homeowners avoid foreclosure.

Why has it taken this long for banks to react? After all, the foreclosure crises began picking up speed more than a year ago.

At the time many lenders said they couldn't unilaterally change the terms of the loans, since most mortgages have been split up and sold as securities, and therefore had many different "owners."

While no explanation has been offered, it's worth noting that lenders' new accommodation follows the government's injection of up to $700 billion of taxpayer money into the banking system. While there's no way to determine whether the banks are using tax dollars to rewrite these loans, many analysts say the money probably makes banks more likely than before to show some flexibility.

The Mortgage Bankers Association reports more than four million hoeowners were at least one payment behind on their mortgage at the end of June 2008, with at least a half million homes in some state of foreclosure.

Fed plan

Meanwhile, the U.S. government is offering a plan to streamline the workout process for millions of homeowners whose mortgages are held by Fannie Mae and Freddie Mac.

Details of the plan that leaked prior to today's announcement revealed the new approach will give lenders more flexibility in modifying loans held by the two mortgage giants, both of which recently received a $100 billion infusion of tax dollars.

Fannie Mae and Freddie Mac currently own or guarantee nearly half of U.S. mortgages.

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