Citi to modify $20 billion in home loans

A new program aimed at homeowners who haven't defaulted yet could help 130,000 mortgage borrowers stay in their homes.

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By Les Christie, staff writer

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NEW YORK ( -- Citigroup says it will expand its foreclosure prevention efforts and try to keep 130,000 troubled borrowers with $20 billion in mortgages in their homes.

The news follows similar initiatives announced earlier this year by IndyMac Bank, which was seized by the Federal Deposit Insurance Corp. last summer, as well as Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) each of which heralded enhanced housing rescue efforts.

Banks are undoubtedly feeling pressured to be more aggressive in aiding home owners, given how many billions of taxpayer dollars have poured into the industry to stem the credit crisis.

The Citi (C, Fortune 500) effort, dubbed the Citi Homeownership Assistance Program, targets 500,000 Citi borrowers. CitiMortgages CEO Sanjiv Das said he expects that more than a quarter of these people, with mortgages worth about $20 billion, will take advantage of the program over the next six months.

"We're reaching out to borrowers in areas of steeper-than-usual falling prices and higher-than-average unemployment," said Das, including California, Michigan, Florida, Nevada, Ohio and Arizona. "These areas are where the concentration of at-risk mortgages are the highest."

The new initiative differs from Citi's existing mortgage mitigation efforts in that it's a much more proactive plan, said Eric Eve, Senior Vice President, Global Community Relations for Citi.

The company will determine where the need for mortgage modification is greatest, based on economic conditions, and send out letters to its borrowers in these areas to tell them that help is available should they need it.

Borrowers on the brink

This new initiative is open only to borrowers who are still current on their loans but are at risk of defaulting - particularly those borrowers who owe more on their mortgages than their homes are currently worth. Additionally, their loans must be owned by the bank, rather than sold off to investors.

Citi already has a program in place to work with borrowers who are delinquent, reducing interest rates to as low as 1% for as long as two years for borrowers who are judged capable of keeping up with lower payments. The bank says that its ongoing mortgage mitigation efforts have produced about 370,000 work outs since the beginning of 2007.

For borrowers who have yet to default, Citi will now aim to reduce their monthly mortgage payment, including property taxes and insurance, to 40% or less of their income. To do that, it will freeze or reduce interest rates, extend the lifetime of the loan or even reduce the loan principal.

Das said the new plan will be implemented immediately and the workouts will be handled in a very fast, streamlined fashion to aid as many homeowners as quickly as possible.

Each of these new foreclosure prevention efforts, from Citi, IndyMac, Bank of America and JPMorgan, represent a significant step forward in resolving the housing crisis, according to Jared Bernstein, senior economist with the Economic Policy Institute. But, he adds, the problem remains overwhelming.

"These programs are helping but the help is marginal - in the hundreds of thousands of homeowners," he said. "But help is needed by millions."

Even after taking these new bank programs into account, Mark Zandi, chief economist for Moody's, estimates that 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale. Some 1.9 million are projected to lose their homes in 2009.

It's certainly doubtful that the banks' housing relief programs will be as successful as they hope.

For example, IndyMac's program was launched in late August, and slated to help as many as 40,000 borrowers. But in late October, FDIC chief Sheila Bair told a congressional committee that the bank had only completed 3,500 work outs.

So Bank of America's claim that it will help 400,000 homeowners, and JPMorgan Chase's goal of rescuing another 400,000 borrowers should probably be taken with a grain of salt.

Bigger plans

Still, Bernstein welcomes every effort. "Let a thousand flowers bloom," he said. "It's like an experiment and, if we're smart, we'll see what plans work and what doesn't." Then, the best aspects of the various plans could be applied to as many at-risk mortgages as possible.

But the bottom line is that the bank programs won't be nearly as effective as any massive foreclosure prevention effort that may yet be implemented by the U.S. government, according to Bernstein.

And there is a possibility that such a program may yet emerge. Congress already enacted its Hope for Homeowners initiative, which will allow borrowers to refinance their mortgages into loans backed by the Federal Housing Authority. Now there is talk of a new $50 billion plan that could bail out as many as 3 million homeowners.

"We can keep the number below a million [homes lost] next year with an effective government effort," said Zandi. "It would be very doable but also very costly."

The single best thing about the bank programs, according to Bernstein, is that they don't cost the taxpayers anything.

"You have to be happy about that," he said. To top of page

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