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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

Mortgage Crisis? Act Now to Avoid Foreclosure • Avoiding Foreclosure Takes More Than Hope --- • Home Prices Fall, But News Is Less Bad For Homeowners • Marketing Analysis Suggests Housing Bottom • Mortgage Rates Dip As Inflation Fears Ease • Have Mortgage Rates Hit Bottom? • Ex-Countrywide CEO Faces Fraud Charges • Pending Home Sales Surge in April • Foreclosure Starts Hit 1 Million For the Year • Mortgage Delinquencies At Record High • Existing Home Sales Rise in April • U.S. Home Values Now 32 Percent Below Their Peak • Bankruptcy Not Helping People Keep Their Homes • Home Values Plunge 14 Percent In First Quarter • One In Five Homeowners Underwater • Pending Home Sales Turn Around In March • Senate Defeats Mortgage 'Cram Down' Bill • Mortgage Rates Keep Falling • Home Sales Fall in March • Home Prices Show Surprising Gain in February • Foreclosures Up 9% in First Quarter • Southern California Home Sales Up Again in March • Mortgage Applications Rise Sharply • Obama Administration Targets Mortgage Fraud • Homeowners Still Behind On Modified Mortgages • Consumers Fall Further Behind on Loan Payments • Pending Home Sales Show Some Life • Home Prices Down To 2003 Levels in January • Fed Action Spurs Refinance Frenzy • Existing Home Sales Jump Five Percent in One Month • California Authorities Arrest "Loan Modification" Scam Artists • Southern California Home Sales Up Again • Loan Modifications Can Reduce Foreclosures, Study Says • Scammers Use Forged Bank Letterhead to Con California Consumers • Foreclosure Activity Up Six Percent in February • States Battle Feds To Enforce Lending Laws • Mortgage Delinquencies Continue to Climb • Obama Begins Mortgage Rescue Program • One Of Five U.S. Mortgages Under Water • Florida Court Blocks Loan Modification Company's Fees --- • 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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