Foreclosures surge

Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, will accelerate anti- foreclosure efforts by streamlining loan modifications to lower monthly payments for more struggling homeowners.

Fannie and Freddie, operating under a government conservatorship, will target loans in which borrowers are at least 90 days delinquent and have high loan-to-income ratios, officials from the Treasury and the Federal Housing Finance Agency said today at a press conference in Washington. The companies may offer homeowners reduced interest rates and longer terms of as much as 40 years to trim monthly payments.

"This new protocol will be a standard for the industry to quickly move homeowners into long-term sustainable mortgages," Neel Kashkari, the Treasury’s interim assistant secretary, said in a prepared statement. The success rate in the past for "curing" delinquent loans with modifications similar to what the government proposes was about 50 percent for both prime and subprime borrowers with damaged credit, according to data from the Mortgage Bankers Association.

"We realize a number of these can’t be saved because of the borrower’s situation," said MBA Chief Economist Jay Brinkmann. "But if we can save half that’s a good result." California, Florida and other high-cost real estate markets where borrowers have larger debt loads or nontraditional mortgages will likely reap the most from the program, he said.

U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record as home prices fell and stricter mortgage standards made it harder for homeowners to sell or refinance, RealtyTrac, a provider of real estate data based in Irvine, California, said on Oct. 23. Paulson has said a housing market recovery is central to the economy’s revival and urged Fannie and Freddie to play a bigger role.

"If housing doesn’t get stabilized, it’s really going to continue to bleed the economy," said Joel Naroff, president of Naroff Economic Advisors. Under the proposal, mortgage servicers will work with borrowers to reduce monthly payments to 38 percent of their gross income, a threshold of affordability, by deferring part of the principal, reducing interest rates and extending the length of the loan term. Homeowners that qualify will receive notices about the program.

Their loan modifications won’t become final until they have made three consecutive payments, and there is no limit to the number of times a loan can be modified. The new payment will include all of the borrower’s monthly housing costs.

Fannie and Freddie are paying mortgage servicers $800 to process each modification, which isn’t available for investment or vacation properties. The companies will absorb the losses on loans or mortgage securities they own. Investors in their guaranteed mortgage bonds "will be made whole when the loans are bought out of the pool for modification," an FHFA official said in an e-mail sent from spokeswoman Corinne Russell.

"This idea is really to keep homeowners in their homes,"said FHFA Director James Lockhart.