The government alongside the private mortgage industry announced an innovative plan to help struggling homeowners trying to keep up with mortgages on Tuesday.
The Federal Housing Finance Agency, the agency that seized control of mortgage backers Fannie Mae and Freddie Mac in September, is a major component in the plan which is targeting the root of the financial credit crisis: falling home prices and record foreclosures.
The plan’s goal is to speed up the renegotiating process for distressed homeowners owning outstanding loans held by the two mortgage giants.
The U.S. foreclosure index is at 10.3, or every 10.3 households out of 1,000 are in foreclosure. This represents over 107,000 foreclosures in the month of September alone and are projected to surpass 1 million by years end. Foreclosures are up 82.6 percent year to date compared to a year ago.
“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 targets mortgages held by Fannie Mae and Freddie Mac represents nearly $31 million in mortgages or almost 60 percent of the market.
There are several ways in which borrowers can be helped by this program. The first is that interest rates can be reduced so that individuals are not paying more than 38 percent of their income on housing, a benchmark set by the government. Another option for borrowers is to extend their mortgages from 30 to 40 years and pay the extended principle interest free.
Lockhart said that he hopes the new idea or mortgage collecting starting Dec. 15 will become a model loan servicing companies.
To qualify for the plan, borrowers must meet several conditions. Borrowers must be at least three months in default on their loans as well as owe more than 90 percent or more than their home is worth at market value. Borrowers who have filed for bankruptcy are excluded from eligibility.
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.
The housing crisis has been very difficult to navigate since the bursting of the bubble last summer, partly because many troubled mortgages were packaged into larger investments and harder to differentiate.
The Associated Press said that Deutsche Bank, one of the largest European banks headquartered in Germany, estimates more than 80 percent of the $1.8 trillion in outstanding troubled loans have been packaged and sold in slices to investors around the world. It appears the majority of those loans will not be helped by the new plan.
The other 20 percent are loans still mostly held by the primary institution and are much easier to negotiate having only one owner.
This announcement comes at the heels of an announcement from the major private bank Citigroup. It is halting foreclosures for borrowers who live in their own homes, have decent incomes and stand a good chance of making lowered mortgage payments, according to the AP.
This is in addition to last month’s announcement by JP Morgan Chase that said the major New York bank would modify $70 million in loans, affecting over 400,000 borrowers.
