Gov't launches new loan aid effort

A record 1.6 million homes will be lost to foreclosure this year and
1.9 million more next year,
according to Celia Chen, an economist for Moody's Economy.com.

With home values plunging as much as 20% from their peaks, more than 12 million homeowners now owe more on their home than it is worth,
according to estimates by Moody's Economy.com.

Although history suggests that the vast majority of those homeowners will continue to make their payments, they are at increased risk of losing their home through foreclosure.

he program will start by Dec. 15.
Flawed plan, critics say
Critics said the plan had flaws.
The modification could leave some borrowers worse off than if they lost their homes now. Because the lender won't write down any of the principal and because home prices in some areas could keep falling for years, borrowers who accept a modification now could end up owing lots of money when the house is finally sold, said Dean Baker, co-director of the Center for Economic and Policy Research. "Unless you have serious writedowns you are probably aren't doing those people any favors," he said.
Sen. Charles Schumer, D-N.Y., said the plan ignores the elephant in the room: Most of the troublesome mortgages are owned by large pools of investors, or have been securitized in a way that makes a modification impossible. "The only viable solution, and it is one we will take up under President-elect Obama, is to modify the bankruptcy code" he said.

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The government and the mortgage industry are launching the most sweeping effort yet to help troubled homeowners by speeding up the process for renegotiating hundreds of thousands of delinquent loans held by Fannie Mae and Freddie Mac.

The Federal Housing Finance Agency, which seized control of the two mortgage finance companies in September, announced the plan Tuesday along with other government and industry officials, including Hope Now, an alliance of mortgage companies organized by the Bush administration last year.

"Foreclosures hurt families, their neighbors, whole communities and the overall housing market," said James Lockhart, the housing finance agency's director. "We need to stop this downward spiral."

The plan could have tremendous importance because Fannie Mae and Freddie Mac own or guarantee nearly 31 million U.S. mortgages, or nearly six of every 10 outstanding. Still, government officials did not have an estimate of how many people would qualify for the new program.

Officials hope the new approach, which goes into effect Dec. 15., will become a model for loan servicing companies, which collect mortgage companies and distribute them to investors. These companies have been roundly criticized for being slow to respond to a surge in defaults.

To qualify, borrowers would have to be at least three months behind on their home loans, and would need to owe 90 percent or more than the home is currently worth. Investors who do not occupy their homes would be excluded, as would borrowers who have filed for bankruptcy.

Borrowers would get help in several ways: The interest rate would be reduced so that borrowers would not pay more than 38 percent of their income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free.


More than 4 million American homeowners, or 9 percent of borrowers with a mortgage were either behind on their payments or in foreclosure at the end of June, according to the most recent data from the Mortgage Bankers Association.