U.S. unveils mortgage plan

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NEW YORK (CNNMoney.com) -- The Bush administration on Tuesday unveiled a new program to modify mortgages and stabilize the battered real estate market, but the plan stops short of providing direct government financial help to at-risk homeowners.

The plan centers on Fannie Mae and Freddie Mac, which between them own or back about 31 million mortgages worth a combined $5 trillion. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages.

Eligibility is determined by several factors: Homeowners must be 90 days or more late in their mortgage payments, owe at least 90% of their home's current value, live in the home on which the mortgage was taken and have not filed for bankruptcy.

Their mortgage payments would be adjusted through lower interest rates or longer repayment schedules with the goal of bringing payments below 38% of monthly household income. Interest rates could be lowered for five years and then raised to a predetermined level. Loan terms could be lengthened to 40 years.

Officials said the standards for loan modifications should fast-track changes in payments. The standards will be applied to loans owned and guaranteed by Fannie and Freddie, but officials said they hope they will also be adopted industrywide.

"We expect that it could significantly increase the number of modifications completed," said James Lockhart, director of the Federal Housing Finance Agency, the regulator that oversees Fannie and Freddie.

There was no estimate available of how many loans owned by Fannie or Freddie are eligible for help under this program. Fannie reported this week that 1.7% of its mortgages by value are delinquent by 90 or more days. Fannie's filings suggest that it has about 18 million mortgages on its books, which would work out to about 300,000 mortgages that could potentially be eligible.

Freddie has yet to release third-quarter results, but at the end of the second quarter it had 115,000 delinquent loans on its books, or about 1% of its total. That number is likely to be significantly higher when it reports third quarter results later this week.

Faith Schwartz, executive director of Hope Now, a coalition of lenders, loan servicers and not-for-profit housing groups, said setting standards for loan modifications is an important advance that she believes other banks and mortgage investors are likely to follow.

"It may not be across the whole industry, but it's an important step forward," she said. "We think over time this is going to affect a couple hundred thousand homeowners."

But even in cases where declining home prices have taken the value of a home to less than is owed on the mortgage, the balance of the loan will not be lowered under this program.

"This is not loan forgiveness; the loans will be paid but at terms affordable for borrowers," said Brian Montgomery, commissioner of the Federal Housing Administration.

The fact that mortgage balances will not be reduced for the so-called underwater mortgages -- those in which a homeowner owes more than the home is worth -- will limit the use and impact of the program, according to some experts.

"When they realize they owe $300,000 on a home worth $200,000, many will decide it's just not worth it," said Dean Baker, co-director of the Center for Economic and Policy Research.

Sen. Charles Schumer, D-N.Y., was quick to criticize the program for not going far enough. He said too many of the loans won't be modified because the investors who own the loan will be able to block a new payment schedule.

"These voluntary plans sound nice, but they don't do the job," Schumer said.

Sen. Christopher Dodd, D-Conn., called the plan "a constructive step forward." But he called on the Bush administration to push ahead with a separate mortgage guarantee program under the $700 billion financial system bailout enacted last month. "We are still awaiting agreement from the Treasury Department to move this program forward," he said.

While a number of major banks, including Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500), have announced loan modifications programs in recent weeks, they hold only a fraction of those owned or guaranteed by Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500).

Most of the mortgage modification programs announced by banks so far cap the payments of homeowners at risk of losing their homes at a level they can afford -- typically about 34% to 40% of their income -- through lower interest rates, longer repayment schedules or reductions in loan balances. But many of those loan modification programs include the option of reducing the balance of the loan, an option not included in this latest program.

Banks and mortgage finance firms have a strong interest in trying to halt foreclosures. The market is already flooded with more homes for sale than there are buyers, and foreclosures will only further drive down home prices and lead to more foreclosures.

Moody's Economy.com forecasts that even with loan modification programs, 1.6 million Americans will lose their homes this year either in a foreclosure or a distressed sale, and another 1.9 million are projected to lose their homes in 2009.

On Monday, Fannie reported a $29 billion loss in the third quarter. The company also reported sharp increases in loan default rates and the amount it is setting aside for future loan losses.