Wednesday, November 12, 2008

Fannie Mae, Freddie Mac Look to Help Borrowers

The regulator for the two largest U.S. mortgage finance companies on Tuesday unveiled a plan that could cut payments for hundreds of thousands of struggling homeowners to help reverse a wave of defaults threatening to swamp the economy.

Homeowners facing foreclosure who are spending more than 38% of their income on mortgage payments could have monthly payments reduced by Fannie Mae and Freddie Mac in an effort to keep their homes, the head of the Federal Housing Finance Agency said.

"As housing prices have fallen, delinquencies on mortgages have tripled," FHFA chief James Lockhart said. "We need to stop this downward spiral."

Fannie Mae and Freddie Mac own or insure 31 million mortgages -- about 58% of all U.S. single-family home loans -- and the move by FHFA is expected to provide relief for a large share of troubled borrowers.

Lockhart said eligible homeowners could see their mortgage rates cut, the life of their loans extended or their principal reduced in an effort to ease payments. Borrowers would need to be delinquent 90 days or more to qualify for new loan terms.

The plan was inspired by a loan-modification effort hatched by the Federal Deposit Insurance Corp, which has begun rewriting loans at IndyMac, a large mortgage lender that failed in July.

FDIC Chairman Sheila Bair, however, faulted the new plan for focusing so narrowly on Fannie Mae and Freddie Mac, which means it will not cover the 60% of seriously delinquent home loans held by Wall Street firms and other investors.

"This is a step in the right direction, but falls short of what is needed to achieve wide-scale modifications of distressed mortgages, particularly those held in private securitization trusts," she said.

Lockhart said he hopes other mortgage finance companies will adopt the new plan as an "industry standard," but mortgage investors often stand in the way of changes to failing loans. In recent weeks, Citigroup Inc, Bank of America Corp and JPMorgan Chase & Co have all said they will ease some loan terms.

But critics say those efforts are also part of a piecemeal approach to the housing crisis that has so far failed to reverse the trend of increasing delinquencies.

"This idea of bringing mortgage companies to the table with mild political pressure and hope that they will aid borrowers has not worked," said John Taylor of the National Community Reinvestment Coalition, an advocate for troubled borrowers.

The plan outlined on Tuesday was conceived in part by Hope Now, an industry group midwifed by U.S. Treasury Secretary Henry Paulson last year to help troubled homeowners. Hope Now has spurred mortgage finance companies to ease terms for borrowers, but those voluntary efforts have not been enough to halt the growing pace of foreclosures.

Lockhart has broad power to modify loans held by Fannie Mae and Freddie Mac since he seized the companies in early September as mounting losses pushed them toward collapse.

Bush administration officials for weeks have been trying to agree on a fresh program to aid borrowers, and Tuesday's announcement could mark the first step in a wider effort.

Bair has emerged as a strong proponent of more-aggressive action, but others fret too much government aid could create a perverse incentive for homeowners to game the system.

The Department of Housing and Urban Development is mulling how to expand its Hope for Homeowners program, which gave the Federal Housing Administration a $300 billion kitty to underwrite failing loans, sources familiar with the plan have said.

That program, which Congress approved in July, went into effect in October. However, it got off to a slow start and officials are eager to loosen the terms and cut some red tape to make it more appealing to mortgage companies.

Under the program in its current form, a mortgage finance company must have a home reappraised and then erase 10% of its value before the loan can win a government guarantee. Officials are considering lowering that required write-off, sources said.

Source: Reuters

2 comments:

Jamie Turner said...

Hi, Rollins Financial Team. Quick question about the auto industry. Since the biggest issue withe the U.S. auto industry is that the labor unions have made them uncompetitive by driving up the cost of every car built, would it be possible for the Big Three to file for bankruptcy, re-negotiate their loans and their labor contracts and come out leaner and meaner? Isn't that what Delta successfully did? Or do I have that wrong?

Rollins Financial Counseling, Inc. said...

Jaime,

It is easy to see your point, but the overriding issues are of jobs and confidence. If you allow the automakers to go bankrupt, that will have chain reactions in the supply chain for jobs. Also, if the big three go away, there goes another hit to the confidence of the consumer.

It is not to say that it could not be beneficial to let them go bankrupt, escape the union contracts and start over, but even then, the pensions would be forced on the government to handle and absorb.

Unfortunately, there is no easy answer. The bailout will happen, and hopefully, things will change. This will should breathe additional life into the suppliers, vendors, consumers, etc.

Thanks for your questions.