Mortgage help gains momentum

Hundreds of billions will be spent to spur the economy. The elephant in the room - foreclosure prevention - hasn't gotten much notice. That is changing.

NEW YORK (CNNMoney.com) -- There are many ways to spend $800 billion to revive the economy. In recent days, President-elect Barack Obama has ticked off many of them: invest in infrastructure projects, help states pay for Medicaid, cut taxes on the middle class, expand use of renewable energy.

But what about helping those at risk of foreclosure, and by extension the housing market as a whole?

Lawmakers in Washington are demanding that more be done, and they are aiming their sights both at the $700 billion financial rescue package known as TARP and the massive economic stimulus bill Obama is pushing as vehicles for new housing measures.

Already, Treasury Secretary nominee Timothy Geithner is working on plans to revamp the way TARP is used to make foreclosure prevention a bigger priority, two transition aides told CNN. Congress has made it known that it likely won't release any more TARP funds until some of the money is earmarked for housing.

For his part, Obama has been shy on details but has said that within a month or two he would unveil "a sweeping effort to address the foreclosure crisis so that we can keep responsible families in their homes."

Meanwhile, Senate Budget Chairman Kent Conrad, D-N.D., on Wednesday said it would be a mistake to pass a stimulus bill without also tackling the housing crisis.

"The housing market is 16% of the economy," Conrad said. "To think that we are going to have a package of economic recovery that does not address housing adequately I think would miss the boat."

What's on the table

Use TARP for homeowners: House Financial Services Chairman Barney Frank, D-Mass., is writing a bill that would impose conditions on the use of any more TARP money and in a memo to colleagues this week called for "substantial efforts" to be made to reduce foreclosures, a spokesman for Frank's office said in an e-mail.

Frank said Friday that his bill will call for $40 billion or $50 billion from TARP funds to be used for foreclosure mitigation. And he's calling on the Treasury to implement a plan by April 1.

That plan essentially must be a version of a plan proposed by FDIC Chairwoman Sheila Bair. Bair's plan would systematically modify loans and provide a government guarantee to protect investors in the event a homeowner re-defaults after the loan has been modified.

The plan also must reduce the costs and writedown requirements for lenders and borrowers of the Hope for Homeowners program, which began in October but has helped virtually no one.

That program offers full government backing for lenders that agree to write down a mortgage to below a home's appraised value. But the loss to lenders can be greater than that reduction because many troubled homeowners are also "under water" due to falling home prices - meaning they owe more on their home than its current market value. So as the law was initially passed, to participate in Hope for Homeowners, lenders in many cases would have to lock in a sizeable loss.

"We wrote it too restrictively. ... [Now] we'll make it more user-friendly," Frank told reporters on Friday.

Reform bankruptcy law: On Thursday, Senate Banking Chairman Christopher Dodd, D-Conn., and Sen. Richard Durbin, D-Ill., said that Citigroup (C, Fortune 500) has agreed to support a proposal that the lending industry has strongly opposed that would allow bankruptcy judges to write down the primary mortgages of homeowners filing for bankruptcy.

The bank's support of the proposal is based on the condition that the change only apply to existing mortgages and that homeowners filing for bankruptcy notify their lenders 10 days before to give them a chance to modify the mortgage.

Other lenders and housing industry interests -- including the powerful National Association of Home Builders -- have also started to lower their resistance to so-called bankruptcy cramdowns.

The long-held argument against cramdowns is that they would cause rates to rise because mortgage securities investors would demand a higher interest rate to compensate for the risk that a judge could rewrite mortgage contracts on terms disadvantageous to the investor.

Offer bigger tax break to home buyers: NAHB has been pushing for all home buyers to get a temporary tax credit for buying a primary residence worth up to 10% of the purchase price. A tax credit is a dollar-for-dollar reduction of one's tax liability.

Currently, only first-time buyers may get a temporary tax credit worth up to $7,500 for a limited period of time. But that credit functions more as an interest-free loan from Uncle Sam because the home buyer has to repay it over time.

Neither Dodd nor Senate Finance member Charles Schumer, D-N.Y., speaking to the press on Thursday, endorsed the idea of an actual tax credit. Dodd said a tax credit would not help prevent foreclosures but could spur economic growth.

And Schumer said there was "broad support" among members of the Senate Finance Committee to make tax policy changes to support housing, particularly existing homes as opposed to newly constructed ones.

Push interest rates down: The National Association of Realtors, among others, has pushed for the Treasury Department to take a more active role in driving mortgage rates down by buying securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac.

Frank has suggested that in order to use TARP funds, Treasury must commit to using some money to "stimulate demand for home purchases ... including through ensuring the availability of affordable mortgage rates for qualified home buyers."

A plan already in place at the Federal Reserve has already had the effect of lowering rates on the 30-year fixed to record lows. The Fed is buying up to $500 billion in mortgage-backed securities backed by Fannie and Freddie, a move that bolstered confidence in the mortgage giants' ability to continue to buy and back loans in the secondary market.

Another idea that has been floated recently is to have Uncle Sam use money to buy down points on home buyers' mortgages to lower interest rates.

By Jeanne Sahadi, CNNMoney.com senior writer

Last Updated: January 9, 2009: 1:04 PM ET; CNN's Jessica Yellin contributed to this report.

End of Year 2008 Home Sales in Sussex County, Delaware

Well, the year has finally come to a close. And what a year it's been. We watched history be made with President-Elect Obama, have seen the stock market crumble, the financial giants fall to their knees, gas prices hit new high records, and the car moguls faltered on the brink of collapse. The real estate market fought hard to recover and regain in the shadow of the Housing Crisis Bailout, and we even saw multiple contracts, and homes sell for over list price. Here in Sussex County, Delaware, we saw the market fight hard, and hold fairly strong. There were 2,909 closed transactions for the year, with an average list price of $365,038, and an average sales price of $339,029. Homes were selling at 91% of list price and averaged about 191 days on the market. Below is a breakdown of what sold. But, before you scroll down, let us raise our glasses, virtually, to 2009! May it be a year of new beginnings and fresh starts. May it win the battle in the financial and real estate markets, and may we all benefit from it's efforts. Every cloud has a silver lining, and every negative becomes a positive. It may just be a hard hill to climb to get to the top. But we will get there.

Single Family - 1,584

Condo / Town Home - 624

Mobile - 283

Multi-Family - 5

Lots / Land - 343

Farms - 8

Commercial - 62

8 Bailout Questions Answered

CNN viewers asked us about the proposed rescue of the auto industry. Here's what you need to know.

Give the money to us instead of them

Why doesn't the government just give us all a large amount of money, and we can buy their cars, and that should help out the car companies? --John

Given the amount of money needed to keep the Big Three automakers afloat, it's a lot more efficient to simply lend them the money rather than to spur sales through an incentive program.

American consumers also don't like to be told what to buy. A rebate program would have to specify that they purchase a vehicle from General Motors, Ford or Chrysler, limiting their choices to the Big Three. Consumers and foreign-based manufacturers would likely pressure the program to open up to at least all cars made in the United States.

Also keep in mind that the government isn't giving money to the automakers - it's lending it to them, with the intention of getting it back in a few years. Rebates are not loans, and consumers could not be expected to pay them back.

Bankruptcy and employees' retirement

What would happen to the employees' pensions and 401(k)s if the auto companies were to file bankruptcy? --Dave

The pension funds of the Big Three are in relatively good shape, so it's not likely that the government will be stuck with a large unfunded obligation.

But some workers, who retired from the automakers in their 50s, could see their benefits cuts if the pensions are taken over by a federal agency. The government doesn't promise to pay the same level of benefits for those who retire before 60.

It's not certain they'd see a benefit cut - it will depend upon the value of the pension fund assets and obligations when the government takes over the pension funds. But a benefit cut is possible.

Joining forces

Maybe they should all merge into one big company. Good idea? --Kevin

Very few experts expect Chrysler to survive as an independent company. As the weakest link of the Big Three, it could use help in some very specific areas of the business.

First, Chrysler doesn't have as much of an overseas presence as GM or Ford, so its health is more reliant on the U.S. market.

It could also use help making competitive small cars. Chrysler's strength is in trucks, vans and big cars. It's already formed alliances with other manufacturers: Chrysler has a deal with Nissan, which will build a small car for it. In return, Chrysler will build a truck for Nissan. Chrysler is also building a minivan for Volkswagen.

The benefits of GM or Ford merging with another company are less obvious. Both are international in scope, which have helped buffer the impact of market share losses at home, at least until recently.

Like Chrysler, GM and Ford could use assistance building a stronger line-up of small cars, but merging with a domestic automaker with the same problem wouldn't help that much. Besides, Ford and GM already have plans to sell some of their European small cars here.

One real benefit of a domestic merger would be to reduce each company's output to its current market share without having to go out of business. It would result in a "controlled contraction." This would also give the combined company greater power in negotiating new contracts with unions and suppliers for additional cost savings.

But closing excess factories and car dealerships takes a lot of cash up front. So any kind merger in the short term is less likely because of the current credit crisis.

Deja vu all over again

The automotive industry is a cornerstone of America; how can we make sure this won't happen again? --James

You can't. There is no way to make absolutely certain that a crisis like this will never happen again. But what can be done is to help the industry change so that it can better compete against foreign automakers who have lower costs.

That will likely mean painful sacrifices for industry stakeholders like auto workers, retirees and auto dealers, not to mention those at the auto executives themselves. But an industry failure would be far worse.

Still, there is a chance we will face this decision - whether to bail out the auto industry - again. But some economists argue that even the cost of repeatedly bailing out the industry will be less than the overall cost of allowing it to collapse.

Pink slip for the corner office

If the big three CEO's have dug this hole for themselves and the industry, why do they get to keep their jobs? --Paul

They may not, at least, not all of them.

Chrysler's Bob Nardelli and Ford's Alan Mulally really can't be blamed for any serious hole-digging. They've only been on the job for a couple of years and the problems were pretty serious before they arrived. Mulally even deserves some credit for the fact that Ford says it isn't in imminent danger of collapse and probably won't need to tap the bail-out line of credit it is requesting.

GM CEO Rick Wagoner may be asked to leave his job as part of a loan package. But the industry's fundamental problems predate his 2000 promotion to the top job. GM has made changes in recent years to move away from over-dependence on SUVs and trucks, and it has also negotiated new union contracts that will bring the company's labor costs more in line with those of foreign-based competitors. But Wagoner could be blamed for not making these changes soon enough.

Given GM's untenable costs and increasing foreign competition, some argue that Wagoner was like a mutual fund manager in a bear market. Success may have been too much to expect. He could be credited for keeping the company alive prior to the recent collapse of the nation's overall economy. But, with calls for someone's head coming from Congress, Wagoner's neck seems to fit the guillotine best. It may be time to see if someone else could do this difficult job better.

Union concessions

Has anyone asked these employees whether they would do the same job for substantially less pay and/or fewer benefits in order to be able to keep the plant open? --Jackie

They get asked that question every time there's a new round of union negotiations. Up until recently, the answer was usually "No, we won't." In 2007 negotiations, the union agreed to major concessions and just recently, it said it was willing to consider more.

But the real problem for carmakers isn't the workers in the factories. It's the retirees. Before the 2007 negotiations, domestic automakers paid more than twice as much per worker hour in labor costs than Japanese competitors making cars here. But the actual hourly pay for workers was very nearly the same.

Domestic manufacturers have been making cars here much longer. That means they have many more retirees. The cost of health care for them is a big part of what drives up the overall hourly cost. And having been here longer, the Big Three have more experienced workers who command the top pay range.

In the 2007 round of contract negotiations, retiree health-care costs were shifted to an outside fund so that after 2010, those costs will not be reflected on the automakers' books. Carmakers are now also allowed to pay new workers a lower hourly rate than current workers. That will save substantial costs in the future, with more future savings with further concessions.

Warranty protection

I just purchased a new GM car, and I am worried if GM fails, what will happen with my warranty, and extended warranty? -Michael

If a Detroit automaker does go out of business, it's likely there will be some kind of warranty coverage for people who bought one of their cars in the past or who buy the remaining inventory. But the nature of that warranty is not certain.

This is a key argument for why bankruptcy wouldn't work. Even if the automakers give assurances that warranties will be covered by a third party, consumers will be nervous, making it more attractive to buy from a strong foreign automaker that can still stand behind its cars.

Installing safeguards

What sort of conditions are likely to be put on the bailout money? Can we at least demand that the automakers produce electric cars or cars with gas mileage we specify? -Shaleen

The bailout plan contains provisions for government oversight. Whoever oversees the companies that borrow money will have powers similar to a bankruptcy judge with the ability to negotiate conditions on outside creditors, unions and other parties. That could spark some painful but necessary changes for long-term survival.

Regarding electric cars, new Corporate Average Fuel Economy rules have already been passed that call for big overall fuel economy increases for all manufacturers. GM, Chrysler and Ford are working on new hybrid and electric cars in part to comply with those future requirements, but also to change the public's impression that they are technologically lagging.

When we're talking about business survival, though, it's important to remember that hybrid and electric cars are unlikely to be very profitable, or profitable at all, for years to come.

By Peter Valdes-Dapena and Chris Isidore, CNNMoney.com senior writers

http://money.cnn.com/galleries/2008/autos/0812/gallery.auto_bailout_questions/index.html

Foreclosure Activity Drops to June Levels

WASHINGTON (AP) - The number of American homeowners dragged into the housing crisis fell last month to the lowest level since June as new state laws lengthened the foreclosure process, RealtyTrac reported Thursday.

"We're going to have a pretty significant spike in January," said Rick Sharga, RealtyTrac's vice president for marketing. Plus, as job losses mount, "increases in foreclosure activity follow that pretty directly," he added.

Nationwide, more than 259,000 homes received at least one foreclosure-related notice in November, down 7 percent from October, but 28 percent higher than a year ago, RealtyTrac said.

The report comes as Democrats, including President-elect Barack Obama, insist that the government must use some of the bailout funds to halt rising foreclosures.

Last week, the Mortgage Bankers Association reported that a record one in 10 American homeowners with a mortgage was either at least one month behind on their payments or in foreclosure at the end of September.

RealtyTrac monitors default notices, auction sale notices and bank repossessions. More than 78,000 properties were repossessed by lenders last month, said the Irvine, Calif.-based company.

The worst recession in decades, falling home values and stricter lending standards have ensnared millions of U.S. households. The Federal Reserve predicts that new foreclosures this year will reach about 2.25 million, more than double pre-crisis levels.

In RealtyTrac's report, Nevada, Florida and Arizona had the nation's top foreclosure rates. In Nevada, one in every 76 homes received a foreclosure filing last month. Florida saw one in every 173 properties receive a foreclosure filing, and in Arizona it was one in every 198 homes. Rounding out the top 10 were California, Michigan, Georgia, Ohio, Colorado, Utah and Idaho.

Among metro areas, the Cape Coral-Fort Myers area in Florida was first, with one in every 59 housing units receiving a foreclosure filing. It was followed by Las Vegas, and the California cities of Merced, Modesto and Stockton.

December 11, 2008 9:55 AM ET, reported by the Associated Press news

http://news.moneycentral.msn.com/category/topicarticle.aspx?feed=AP&Date=20081211&ID=9442804&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

Half of modified mortgages in default again

Data raises questions if government funds might be better spent on job creation.

WASHINGTON (AP) -- More than half of all homeowners who had their loans modified to make the payments more affordable in the first half of the year are already in default again, banking regulators said Monday.

The new data raise questions about whether government money may be better spent on creating jobs, rather than averting foreclosures, said John Reich, director of the federal Office of Thrift Supervision office at a housing industry forum sponsored by his agency.

"I do have concerns about allocating federal resources" Reich said.

However, many experts claim the bulk of loan modifications don't actually provide much financial relief for borrowers.

The government's data don't include enough detail about the types of the loan modifications that were made, said Sheila Bair, chairman of the Federal Deposit Insurance Corp. "The quality of the [modifications] are not what they should be," she said.

The U.S. economic picture has darkened over the past month. One in 10 Americans with a mortgage is either behind or in foreclosure, and more than 500,000 jobs were lost in November.

Unemployment stands at 6.7%, and the worldwide credit markets have only improved modestly from the freeze that led Congress to approve a $700 billion bailout before the election.

Discussion on Monday's focused on how broad the government's intervention should be, rather than whether the government should play any role at all. The U.S. is on track for 2.25 million foreclosures this year.

"We need a bottom-up approach, in my view, by modifying people's mortgages and helping them stay in their homes," said New Jersey Gov. Jon Corzine.

Corzine called for a three to six month halt to foreclosures while the government works out a more aggressive plan.
Mark Zandi, chief economist at Moody's Economy.com, said the public is likely to be more sympathetic to efforts to assist troubled borrowers, because the link between the foreclosure crisis and the sinking economy is increasingly clear to most Americans.

"It's now in every corner of the country," Zandi said. "I think that people understand that this is a broader issue."

During an interview that aired Sunday on NBC's "Meet the Press," President-elect Barack Obama declined to say how large an economic stimulus plan he envisions. He said his blueprint for recovery will include help for homeowners facing foreclosure on their mortgages if President George W. Bush has not already acted when Obama takes office next month.

For nearly a year, some consumer advocates, lawmakers and think tanks have advocated a dramatic government response. The effort, they say, should be similar to created the Home Owners' Loan Corp. in 1933 to help borrowers refinance troubled home loans during the Great Depression.

The Bush administration has focused mainly on voluntary industry efforts to modify loans, and those have not stopped the surge in foreclosures.

Bailout Efforts Now Focus On Main Street, Not Banks

Attention Santa Claus: The financial bailout has a new address—It's Main Street, not Wall Street.

Having thrown trillions of dollars at Wall Street and the financial sector, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson now appear ready to do the same for Main Street, with a spate of proposals to help homeowners and the housing market.

In what seemed like a well-choreographed, one-two punch this week, Paulson floated a trial balloon for a plan to ease mortgage rates to stimulate new home buying while Bernanke offered a number of proposals to address soaring home foreclosures.

“It looks like they're finally getting serious about doing something, which is important,” says Robert Brusca, chief economist Fact & Opinion Economics. "There are different remedies for different circumstance and enough programs out there for enough people. I’m encouraged.”

Brusca is among the many analysts who have criticized the Bush administration—and Paulson in particular—for doing too little for homeowners struggling with a housing recession and a credit crunch, while aggressively bailing out banks, brokerages and financial institutions such as Citigroup [C 7.71 0.31 (+4.19%) ] and AIG [AIG 1.94 0.10 (+5.43%) ] at great expense.

That crisis management focus, however, has changed recently, perhaps because of pressure from the Democratic Party following its overwhelming general election victory and a worsening foreclosures rate that is making a bad economy even worse.

The new effort also undescores policymakers' frustration and apparent failure to lower borrowing costs and spur lending, despite a variety of unusual moves, which has included policy reversals.

“This really is the gang that couldn’t shoot straight,” says NYU professor Lawrence White, who previously served as a White House economist and savings and loan regulator.

Managing Mortgages
Criticism and second-guessing aside, the heightened efforts—which began with the Fed’s announcement last week that it would buy some $600-billion in mortgage-backed securities—has already helped the mortgage market by lowering rates.

“Absolutely. For the first time in a long time we are seeing the market reacting to the issues,” says a somewhat ecstatic Melissa Cohn, CEO of the Manhattan Mortgage Company. “Borrowing costs in general are just too high, even as real estate prices have come down.”

Cohn says customer call volume is up 300 percent since the Fed announcement last week.
For the first time this year, the average rate on a 30-year mortgage appears to be safely and solidly below 6 percent m—and headed lower.

As CNBC first reported, the Treasury plan under consideration would buy securities underpinning loans guaranteed by Fannie Mae and Freddie Mac with the goal of pushing rates to as low as 4.50 percent.

For many in the industry, that appears to be a magic and powerful number.

The National Association of Realtors estimates that a drop from 6 percent to 4.50 percent will result in the purchase of 750,000 new homes, on top of what’s now a 5-million annual pace.
On a $200,000 house, bought with a 10-percent down payment, the difference in monthly payments is $912 vs. $1079.

“Buyers will jump in if affordability improves,” says the group’s chief economist Lawrence Yun. “The first step is to stabilize prices and absorb the inventory. As long as home price continue to decline there's very little chance of any recovery.”

Fighting Foreclosures
Any recovery is also dependent on stemming the tide of foreclosures, say industry players and analysts, which is what makes the government’s new two-prong approach promising.

Previous measures to address foreclosures through loan modification and other kinds of forbearance, such as the Hope for Homeowners program, have been largely ineffective, according to observers in both the private sector and government.

Another obstacle to modification has been the vast securitization of mortgages, creating a multi-party dynamic to negotiation and modification.

Bernanke's proposals Thursday addressed that and touched on other key concepts such as the government purchase and refinancing of troubled mortgages in bulk, increasing the affordability of monthly payments—which might include the government assuming some of the cost of the write down—and offering more attractive inducements to lenders and firms that service the loans.

“The government becomes the lender and restructures the loan to make them sustainable,” says the American Enterprise Institute’s Alex Pollock, who was CEO of the Chicago Home Loan Bank for about a decade and recently advised Congress on the housing issue.

“Step by step, it looks like we're getting back to the 1930s’ Home Owners Loan Corporation,” he adds, referring to the government’s Depression-era entity that wound up with about 20 percent of the country’s mortgages on its books but still managed to show a profit at the time it was shut down.

Second Guessing
Though the recent measures were generally well received, there's no certainty they'll be implemented. What's more, the probable cost is unknown.

More generally, government involvement of that scale worries some for both economic and ethical reasons.

Skeptics say lower rates alone won't be effective , given the deteriorating condition of the economy.

And, as with the financial sector’s bailout, such measures put too much taxpayer money at risk while rewarding excessive risk-taking by borrowers and lenders. That could anger responsible taxpayers and homeowners, especially since the government's latest proposals lack any provisions for refinancing sound mortgages.

Others worry about the potential for fraud and exploitation, as well as the unintended—and negative—consequences of government intervention in the free markets, particularly at a time when some say there are signs individual real estate markets may be nearing or even at a bottom.

“To what extent does this prolong deflation of the housing bubble,” says independent banking analyst Bert Ely. “It’s one of the things I find troubling about a lot of these programs.”
The answer to that question, of course, as well as the overall effectiveness of the measures won’t be known for some time.

People like mortgage broker Cohn, who’ve seen their business trampled by the credit crunch, are ready to make a leap of faith.

“Everyone is looking for stabilizing factors in the economy,” she says. “The way to save the economy is by saving Main Street.”

By Albert Bozzo, Senior Features Editor 04 Dec 2008 04:17 PM ET http://www.cnbc.com/id/28055285/

U.S. Mortgage Plan Falls Short

Plan to modify Fannie, Freddie loans will help some, but more needs to be done, experts said.

NEW YORK(CNNMoney.com) -- The federal government's plan to streamline modifications of troubled loans held by Fannie Mae and Freddie Mac won't help the majority of people threatened with foreclosure, experts said.

Under a plan unveiled Tuesday, homeowners whose loans are owned or backed by the mortgage finance companies and who are at least 90 days behind can enter a streamlined modification program. Their payments would be adjusted through lower interest rates or longer repayment terms that would total no more than 38% of their monthly household income. In some cases, payment on part of the loans' principal may be deferred, though not reduced.

The interest rate could be lowered to as little as 3% for five years. After that, it would increase by 1 percentage point a year until it hits either the market rate or the original interest rate, whichever is lower, officials said.

Unlike previous federal efforts, participation by servicers is not voluntary. They will now work with eligible borrowers to reach more affordable mortgage payments, using the guidelines laid out Tuesday.

Also, officials hope the new program, which could help more than 400,000 homeowners, will convince servicers who handle loans held by private investors to follow suit.

Program doesn't cover most subprime loans
While experts and some government officials called the plan a positive step forward, they said much more needs to be done to address the mortgage crisis. The program does not address the heart of the problem -- troubled loans held by private investors.

Though Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) own or guarantee 58% of all mortgages on single-family homes, these loans represent only 20% of serious delinquencies. The majority of the problem mortgages were bundled into securities, which were sold in pieces to investors.

"This is a step in the right direction but falls short of what is needed to achieve widescale modifications of distressed mortgages, particularly those held in private securitization trusts," said Federal Deposit Insurance Corp. chairman Sheila Bair, who has proposed an alternate plan addressing securitized loans. "As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans."

Problems in the mortgage market remain concentrated in the subprime sector, which are mainly held by investors who have resisted modifying the loan terms.

"Most foreclosures are happening on subprime loans that Fannie and Freddie don't control," said Eric Stein, senior vice president at the Center for Responsible Lending, which has long pressed the federal government to help delinquent borrowers. "More is still needed to address foreclosures on these mortgages. To date, voluntary modifications haven't been sufficient. That's why we still have a foreclosure crisis."

To broaden existing foreclosure fixes, Bair supports using up to $50 billion of the $700 billion financial sector rescue plan to guarantee modified loans. This would give servicers an incentive to adjust the loan terms and could help up to 3 million homeowners, though the number is not firm.

Meanwhile, the FDIC has already adopted a streamlined process to modify troubled loans owned or serviced by the failed IndyMac Bank, which the agency took over in mid-July. Some 3,500 borrowers have accepted the workouts, which also aim to keep payments at no more than 38% of gross income.

Several major servicers -- including Bank of America, JPMorgan Chase and Citigroup -- have recently announced expansions of their foreclosure prevention efforts, which could aid nearly a million more borrowers.

The programs will also seek to make payments more affordable by cutting interest rates or stretching out loan terms, but some homeowners can also get their mortgage principal reduced depending on their servicer and financial situation.

Deferring payment on principal
Reducing principal is key to keeping some borrowers -- especially those whose house values have fallen below their mortgage balances -- in their homes, experts said. It makes both the loan more affordable and gives homeowners more incentive not to walk away.

In announcing the plan, officials made a point of saying that borrowers must repay their current mortgage in full, just with more affordable monthly payments.

"Loan modifications are not a gift ... the principal cut on the front end will be paid at the end of the loan, either in extended payments or a balloon payment," said Brian Montgomery, commissioner of the Federal Housing Administration. "This is not loan forgiveness."

However, to make payments affordable, servicers may choose to defer part of the payment -- with no interest -- until the end of the loan, officials said. For borrowers whose homes are worth less than their mortgages, servicers might defer the difference.

Here's how it would work: Let's say a homeowner has a $200,000 mortgage on a house now worth $150,000. The servicer may defer payment on $50,000 of principal. If the home recovers its value and the borrower sells it, he or she would have to pay back the deferred amount at that time. If it doesn't recover, the borrower would have to work out a deal with the servicer, likely a short sale, in which the bank forgives the difference between the sale price and the mortgage balance.

If the borrower stays in the home, he or she would have to pay the deferred amount within 30 days of the last payment, likely 30 or 40 years from now. Homeowners could take out a new mortgage to cover that balloon payment.

Setting industry standards
Officials hope that Fannie and Freddie's influence in the mortgage market will prompt servicers working with private investors to use this streamlined procedure in their own modifications. Often, investors defer to the mortgage finance agencies to set the methodology.

"I ask the private label mortgage-backed securities servicers and investors to rapidly adopt this program as the industry standard," said James Lockhart, head of the Federal Housing Finance Agency, which oversees Fannie and Freddie. "Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values."

By Tami Luhby, CNNMoney.com senior writer
Last Updated: November 11, 2008: 8:48 PM ET

HOPE for Homeowners Program Information

WASHINGTON - The Bush Administration today unveiled additional mortgage assistance for homeowners at risk of foreclosure. The HOPE for Homeowners program will refinance mortgages for borrowers who are having difficulty making their payments, but can afford a new loan insured by HUD's Federal Housing Administration (FHA).

"For families struggling to keep up with their mortgage payments, this program will be another resource to refinance into a loan they can afford," said HUD Secretary Steve Preston. "FHA remains a safe and affordable alternative to the high-priced mortgage loans that threaten homeowners' ability to retain their homes. We strongly encourage borrowers to work with their lenders to determine if HOPE for Homeowners is the right program for them."

The HOPE for Homeowners program was authorized by the Economic and Housing Recovery Act of 2008. Since the President signed this vital legislation into law on July 30, 2008, the HOPE for Homeowners Board of Directors has worked diligently to develop and implement the program as directed by Congress. The Board was charged with establishing underwriting standards to ensure borrowers, after any write-down in principal, have a reasonable ability to repay their new FHA-insured mortgage.

The HOPE for Homeowners program begins today and ends September 30, 2011. The program is available only to owner occupants and will offer 30-year fixed rate mortgages - so the borrower's last payment will be the same as the first payment. In many cases, to avoid what would be an even costlier foreclosure, banks will have to write down the existing mortgage to 90 percent of the new appraised value of the home.

Borrower Eligibility
Borrowers are encouraged to contact their lender to determine eligibility, but may be eligible if, among other factors:

• The home is their primary residence, and they have no ownership interest in any other residential property, such as second homes.
• Their existing mortgage was originated on or before January 1, 2008, and they have made at least six payments.
• They are not able to pay their existing mortgage without help.
• As of March 2008, their total monthly mortgage payments due were more than 31 percent of their gross monthly income.
• They certify they have not been convicted of fraud in the past 10 years, intentionally defaulted on debts, and did not knowingly or willingly provide material false information to obtain their existing mortgage(s).

How the HOPE for Homeowners program works
"HOPE for Homeowners will add to HUD's existing efforts to make FHA refinancing available to homeowners who need it most," said FHA Commissioner Brian D. Montgomery. "One year ago, FHA expanded refinancing into its FHASecure program. Since that time, we have helped more than 360,000 families keep their homes by refinancing with FHA, and we will assist a total of 500,000 families by the end of this year."

The Board expects that the primary way homeowners will participate in the program is by working with their current lender. HOPE for Homeowners will serve as another loss mitigation tool available to distressed borrowers.

HOPE for Homeowners also includes the following provisions:

• The loan amount may not exceed a maximum of $550,440.
• The new mortgage will be no more than 90 percent of the new appraised value including any financed Upfront Mortgage Insurance Premium.
• The Upfront Mortgage Insurance Premium is 3 percent and the Annual Mortgage Insurance Premium is 1.5 percent.
• The holders of existing mortgage liens must waive all prepayment penalties and late payment fees.
• The existing first mortgage must accept the proceeds of the HOPE for Homeowners loan as full settlement of all outstanding indebtedness.
• Existing subordinate lenders must release their outstanding mortgage liens.
• Standard FHA policy regarding closing costs applies, and they may be:
  Financed into the new loan provided the value of the mortgage (including the Upfront Mortgage Insurance Premium) does not exceed 90 percent of the new appraised value of the home.
  Paid from the borrowers' own assets.
  Paid by the servicing lender or third party (e.g., federal, state, or local program).
  Paid by the originating lender through premium pricing.
• The borrower must agree to share with FHA both the equity created at the beginning of this new mortgage and any future appreciation in the value of the home.
• The borrower cannot take out a second mortgage for the first five years of the loan, except under certain circumstances for emergency repairs.

The lender will disclose to the homeowner the benefits of the program including home retention, a new affordable mortgage based on the current appraised value, and 10 percent equity. The lender will also explain the prohibition against new junior liens against the property unless directly related to property maintenance, and a minimum of 50 percent equity and appreciation sharing with the Federal government.

The costs to the homeowner include the upfront and annual insurance premiums, as well as a share of the equity created by the write-down associated with the HOPE for Homeowners mortgage and any future appreciation in the value of the home. At settlement, subordinate lien holders will receive a certificate that evidences their interest as an obligation backed by HUD, with payment conditional on the value of HUD's appreciation share.

If the home is sold or refinanced, the homeowner will share the equity with FHA on a sliding scale ranging from a 100 percent FHA share after the first year to a minimum of 50 percent after five years. The lien holder that previously held the highest priority will receive payment up to a proportion of its original interest, not to exceed the amount of available appreciation. This type of delayed payoff will take place until all prior lien holders are satisfied or the amount of available appreciation is exhausted. All remaining appreciation is remitted to FHA.

The HOPE for Homeowners Board of Directors includes HUD Secretary Steve Preston, Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and FDIC Chairman Sheila Bair. They have named the following people to serve on the board as their designees: FHA Commissioner and Chairman of the Board Brian Montgomery, Federal Reserve Board Governor Elizabeth Duke, Treasury Assistant Secretary for Economic Policy Phillip Swagel, and Federal Deposit Insurance Corporation Director Tom Curry.

Read more about HOPE for Homeowners at www.hud.gov/hopeforhomeowners.

Treasury Secretary Comments on Rescue Package

November 12, 2008

U.S. Treasury Secretary Henry M. Paulson, Jr. Comments on Financial Rescue Package and Provides Economic Update

Current State of Global Financial System

The actions taken by Treasury, the Federal Reserve and the FDIC in October have clearly helped stabilize our financial system. Before we acted, we were at a tipping point. Credit markets were largely frozen, denying financial institutions, businesses and consumers access to vital funding and credit. U.S. and European financial institutions were under extreme pressure, and investor confidence in our system was dangerously low.

We also acted quickly and in coordination with colleagues around the world to stabilize the global financial system. Going into the Annual IMF/World Bank meetings in early October, I made clear that we would use the financial rescue package granted by Congress to purchase equity directly from financial institutions – the fastest and most productive means of using our new authorities to stabilize our financial system. We launched our capital purchase program the following week when we announced that nine of the largest U.S. financial institutions, holding approximately 55 percent of U.S. banking assets would sell $125 billion in preferred stock to the Treasury. At the same time, the FDIC announced it would temporarily guarantee all newly issued senior unsecured debt of participating organizations for up to three years. In addition, the FDIC provided an unlimited guarantee on non-interest bearing transaction accounts that expires at the end of next year.

As I assess where we are today, I believe we have taken the necessary steps to prevent a broad systemic event. Both at home and around the world we have already seen signs of improvement. Our system is stronger and more stable than just a few weeks ago. Although this is a major accomplishment, we have many challenges ahead of us. Our financial system remains fragile in the face of an economic downturn here and abroad, and financial institutions' balance sheets still hold significant illiquid assets. Market turmoil will not abate until the biggest part of the housing correction is behind us. Our primary focus must be recovery and repair.

Housing and Mortgage Finance

Overall, we are in a better position than we were, but we must address the continued challenges of a weak economy, especially the housing correction and lending contraction.

On housing, we have worked aggressively to avoid preventable foreclosures and keep mortgage financing available. In October 2007, we helped establish the HOPE NOW Alliance, a coalition of mortgage servicers, investors and counselors, to help struggling homeowners avoid preventable foreclosures. HOPE NOW created a streamlined protocol to assist struggling borrowers who could afford their homes with a loan modification. The industry is now helping 200,000 homeowners a month avoid foreclosure. In addition, HUD has created new programs to complement existing FHA options, and to refinance a larger number of struggling borrowers into affordable FHA mortgages.

Most significantly, we acted earlier this year to prevent the failure of Fannie Mae and Freddie Mac, the housing GSEs that now touch over 70 percent of mortgage originations. I clearly stated at that time three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

Fortunately we acted, citing concerns about both the quality and quantity of GSE capital. Unfortunately, our actions proved all too necessary. The GSEs were failing, and if they did fail, it would have materially exacerbated the recent market turmoil and more profoundly impacted household wealth: from family budgets, to home values, to savings for college and retirement.

Earlier this week, Fannie Mae reported a record loss, including write-downs of its deferred tax assets that make up a significant portion of its capital. We monitor closely the performance of both Fannie Mae and Freddie Mac, and both are performing within the range of our expectations. The magnitude of the losses at Fannie Mae were within the range of what we expected, and further confirms the need for our strong actions.

Eight weeks ago, Treasury took responsibility for supporting the agency debt securities and the agency MBS through a preferred stock purchase agreement that guarantees a positive net worth in each enterprise – effectively, a guarantee on GSE debt and agency MBS. We also established a credit facility to provide the GSEs the strongest possible liquidity backstop. As the enterprises go through this difficult housing correction we will, as needed and promised, purchase preferred shares under the terms of that agreement. The U.S. government honors its commitments, and investors can bank on it.

When we took action in September, I said that we would be entering a "time out" – a period where the new President and Congress must decide what role government in general, and the GSEs in particular, should play in the housing market. In my view, government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. In the weeks ahead, I will share some thoughts outlining my views on long term reform.

In the meantime, the GSEs now operate on stable footing. They have strong government support backing both future capital and liquidity needs. We have stabilized the GSEs and limited systemic risk, and our authorities provide us with additional flexibility to use as necessary to accomplish our objectives.

Implementing the Financial Rescue Package

More recently, we have also taken extraordinary steps to support our financial markets and financial institutions. As credit markets froze in mid-September, the Administration asked Congress for broad tools and flexibility to rescue the financial system. We asked for $700 billion to purchase troubled assets from financial institutions. At the time, we believed that would be the most effective means of getting credit flowing again.

During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets – our initial focus – would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.

Of course, before that time, the only instances in which Treasury had taken equity positions was in rescuing a failing institution. Both the preferred stock purchase agreement for Fannie Mae and Freddie Mac, and the Federal Reserve's secured lending facility for AIG came with significant taxpayer protections and conditions. As we planned a capital purchase plan to support the overall financial system by strengthening balance sheets of a broad array of healthy banks, the terms had to be designed to encourage broad participation, balanced to ensure appropriate taxpayer protection and not impede the flow of private capital.

Capital Purchase Plan

We announced a plan on October 14th to purchase up to $250 billion in preferred stock in federally regulated banks and thrifts. By October 26th we had $115 billion out the door to eight large institutions. In Washington that is a land-speed record from announcing a program to getting funds out the door. We now have approved dozens of additional applications, and investments are being made in approved institutions. Although we are moving very quickly it will take time to complete legal contracts and execute investments in the significant number of institutions who meet the eligibility requirements and are approved, but we are on the path to getting this done.

Although this program's primary purpose is stabilizing our financial system, banks must also continue lending. During times like these with a slowing economy and some deterioration in credit conditions, even the healthiest banks tend to become more risk-averse and restrain lending, and regulators' actions have reinforced this lending restraint in the past. With a stronger capital base, our banks will be more confident and better positioned to play their necessary role to support economic activity. Today banking regulators issued a statement emphasizing that the extraordinary government actions taken by the Fed, Treasury and FDIC to stabilize and strengthen the banking system are not merely one-sided; all banks – not just those participating in the Capital Purchase Program – have benefited, so they all also have responsibilities in the areas of lending, dividend and compensation policies, and foreclosure mitigation. I commend this action and I am particularly focused on the importance of prudent bank lending to restore our economic growth.

Since announcing the Capital Purchase Program, we have been examining a wide range of ideas that can further strengthen the financial system and get lending going again to support the broader economy. First and foremost, because the system remains fragile, we must continue to stand ready to prevent systemic failures. That is the basis for Monday's action to purchase preferred shares in AIG. The stability of our system remains the highest priority.

We must also allow markets and institutions to absorb the extensive array of new policies put in place in a very short period of time. The injection of up to $250 billion of capital into individual banks, the FDIC's temporary guarantee of bank debt and the Federal Reserve's multiple liquidity facilities for banks, money funds and commercial paper issuers have all significantly enhanced liquidity and helped improve market conditions.

Priorities for Remaining TARP Funds

We have evaluated options for most effectively deploying the remaining TARP funds, and have identified three critical priorities. First, we must continue to reinforce the stability of the financial system, so that banks and other institutions critical to the provision of credit are able to support economic recovery and growth. Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions. Second, the important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt. Addressing these two priorities will have powerful impacts on the overall financial system, the strength of our financial institutions and the availability of consumer credit. Third, we continue to explore ways to reduce the risk of foreclosure.

Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets.


Further Strategies

First, we are designing further strategies for building capital in financial institutions. Stronger capital positions will enable financial institutions to better manage the illiquid assets on their books and better ensure that they remain healthy. Any future program should maintain our principle of encouraging participation of healthy institutions while protecting taxpayers. We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments. In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program; broadening access in this way would bring both benefits and challenges. Non-bank financial institutions provide credit that is essential to U.S. businesses and consumers. However, many are not directly regulated and are active in a wide range of businesses, and taxpayer protections in a program of this sort would be more difficult to achieve. Also before embarking on a second capital purchase program, the first one must be completed, and we have to assess its impact and use this information to evaluate the size and focus of an additional program in light of existing economic and market conditions.

Second, we are examining strategies to support consumer access to credit outside the banking system. To date, Fed, FDIC and Treasury programs have been targeted at our banking system, and the non-bank consumer finance sector continues to face difficult funding issues. Specifically, the asset-backed securitization market has played a critical role for many years in lowering the cost and increasing the availability of consumer finance. This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy. With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment. By doing so, we can lower costs and increase credit availability for consumers. Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy. While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending.

Third, we are examining strategies to mitigate mortgage foreclosures. In crafting the financial rescue package, we and the Congress agreed that Treasury would use its leverage as a major purchaser of troubled mortgages to work with servicers and achieve more aggressive mortgage modification standards. Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment.

FDIC Chairman Bair has given us a model, in the mortgage modification protocol she developed with IndyMac Bank. Through the end of October, the FDIC has completed loan modifications for 3,500 borrowers, with several thousand more modifications currently being processed. These modifications have reduced payments for participating homeowners by an average of $380 month, or about 23 percent. We have worked with the FHFA, the GSEs, HUD and the Hope Now alliance who yesterday announced a streamlined industry-wide modification program that for the first time adopts an explicit affordability target similar to the model pioneered at IndyMac. With this commitment, the GSEs and large portfolio investors are setting a new industry standard for foreclosure mitigation. Potentially hundreds of thousands more struggling borrowers will be enabled to stay in their homes at an affordable monthly mortgage payment.

Beyond these efforts, there has been significant work to design and evaluate a number of proposals to induce further modifications. Each of these would, however, require substantial government subsidies. The FDIC, for example, has developed a proposal that Treasury and others in the Administration continue to discuss. I believe it is an important idea. As we evaluate the merits of any new proposal, we also will have to identify and justify the means to finance it. We must be careful to distinguish this type of assistance, which essentially involves direct spending, from the type of investments that are intended to promote financial stability, protect the taxpayer, and be recovered under the TARP legislation. Maximizing loan modifications, nonetheless, is a key part of working through the housing correction and maintaining the quality of communities across the nation, and we will continue working hard to make progress here.

We will continue to pursue the three strategies I have just outlined: how best to strengthen the capital base of our financial system; how best to support the asset-backed securitization market that is critical to consumer finance, and how to increase foreclosure mitigation efforts. All of these strategies are important, but ensuring the financial system has sufficient capital is essential to getting credit flowing to consumers and businesses and that is where the bulk of the remaining TARP funds should be deployed --- in a program to support the system and as a contingency reserve for addressing any unforeseen systemic events.

We are focused on developing and preparing programs which can be implemented for each of these strategies. We will continue to brief President-elect Obama's transition team on all of these issues.


Global Challenge

Of course managing through this market turmoil while mitigating the impact of the credit crisis is a global as well as a national issue. We in the U.S. are well aware and humbled by our own failings and recognize our special responsibility to the global economy. The U.S. housing correction exposed gaping shortcomings in the outdated U.S. regulatory system, shortcomings in other regulatory regimes and excesses in U.S. and European financial institutions. These institutions found themselves with large holdings of structured products, including complex and opaque mortgage-backed securities. Some European institutions were characterized by high leverage, exposure to their own housing markets, exposure to Central European institutions, weak business models or overly aggressive expansion, while others faced weaknesses because of inadequate depositor protection systems. It should not be surprising that after 13 months of stress in the global capital markets, banks from the U.S. to the U.K., from Germany to Iceland, from Russia to France, had difficulties that exposed some of these weaknesses for the first time. For some of these banks, this proved to be a hurdle too high and government action was necessary to support financial stability.

In that regard the G7 Finance Ministers meeting last month represented a major turning point in stabilizing the global financial system as the ministers came together to support a number of powerful strategies that were soon turned into effective actions in the United States and Europe. It is also clear that our first priority must be recovery and repair. And of course we must take strong actions to fix our system so that the world does not have to suffer something like this ever again. The Leaders summit President Bush will be hosting this weekend marks a very important step in what will be an ongoing process of recovery and reform.

And to adequately reform our system, we must make sure we fully understand the nature of the problem which will not be possible until we are confident it is behind us. Of course, it is already clear that we must address a number of significant issues, such as improving risk management practices, compensation practices, oversight of mortgage origination and the securitization process, credit rating agencies, OTC derivative market infrastructure and regulatory policies, practices and regimes in our respective countries. And we recognize that our financial institutions and our markets are global, but our regulatory regimes are national, so we will examine how best to improve cooperation and information sharing to foster global financial system stability.

But let us not forget one fundamental issue which lies at the heart of our problems. Over a period of years, persistent and growing global imbalances fueled a dramatic increase in capital flows, low interest rates, excessive risk taking and a global search for return. Those excesses cannot be attributed to any single nation. There is no doubt that low U.S. savings are a significant factor, but the lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe have also fed the imbalances.

If we only address particular regulatory issues – as critical as they are – without addressing the global imbalances that fueled recent excesses, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitality going forward. The pressure from global imbalances will simply build up again until it finds another outlet.

The nations attending this weekend's summit represent the 20 largest economies in the world – over 77 percent of global GDP. President Bush is convening this group of countries to discuss and address problems such as global imbalances, making regulatory regimes more effective, fostering cooperation among regulators, and reforming international institutions to better address today's global economy. We can't simply task the IMF, the FSF or other International Financial Institutions to solve the problems, unless member nations all see that they have a shared interest in a solution. There are no easy answers, because until we reach a consensus on a broad-based reform agenda, we will not reach a solution. This weekend provides an opportunity for nations to take an important step, but only one step, on the necessary path to reform.

Conclusion

The road ahead, for the U.S. economy and the global economy, is full of challenges. And it will take strong leadership to address them. I am confident the United States, under this and the next Administration, will rise to these challenges. I will do everything I can to put us on the right path, both by working diligently through the end of my term and by working closely to ensure the smoothest possible transition.

Federal Mortgage Rescue Plan Due

Fannie Mae, Freddie Mac and the administration officials are set to announce program to help at-risk homeowners.

NEW YORK (CNNMoney.com) -- The Bush administration is set to unveil on Tuesday a potentially extensive new program to modify mortgages and help at-risk homeowners and stabilize the battered real estate market.

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

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 the nation's mortgages compared with Fannie and Freddie.

Despite calls from members of Congress and some housing advocates for the government to take a more direct role in preventing foreclosures, federal agencies have been slow to present their own plans to modify the loans of millions of homeowners at risk.

Sheila Bair, the chairman of the Federal Deposit Insurance Corp. whose agency took over home lender IndyMac in July, testified to the Senate Banking Committee on Oct. 23 that her agency was working "closely and creatively" with the Treasury Department on a mortgage rescue plan but revealed few details.

She suggested the government would establish standards for loan modifications and provide guarantees for loans meeting those standards so that "unaffordable loans could be converted into loans that are sustainable over the long term."

But in the three weeks since then there has been little in the way of new direct federal help for homeowners, even as the government pumped nearly $50 billion into regional banks and reworked the bailout of American International Group, while pressure mounted from Congress to help the nation's automakers and state and local governments.

Most of the mortgage modification programs announced by banks so far try to 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. There are reports that the Fannie-Freddie plan will cap payment at the 38% level, though those details could not be confirmed ahead of the meeting.

Representatives of another major bank, Wells Fargo (WFC, Fortune 500), are also set to attend a 2 p.m. ET briefing by the Federal Housing Finance Agency, the government regulator of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500).

It is clearly in the interest of the mortgage finance firms as well as banks to take steps to halt foreclosures. The market is already flooded with far more new and existing homes for sale than there are buyers, and foreclosures will only further drive down home prices and lead to more foreclosures in the future.

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 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.

By Chris Isidore, CNNMoney.com senior writer
Last Updated: November 11, 2008: 12:26 PM ET

A Wakeup Letter to Washington

Note to lawmakers: It's high time to take care of unfair costs for consumers. Let's have some change for fair play.

Take a memo.

To: Our new Congress; the President-elect
From: Nickeled-and-dimed Americans
Re: The (other) financial mess

Congratulations on winning your elections. We trust you won't spend too much time celebrating, though. We taxpayers have had to lay nearly $1 trillion on the line to keep the banking and credit system from collapsing. Cross our fingers, it just might work.

Your task now is to reform the financial industry that helped get us into this jam in the first place. Already there's a fervor in Washington to clamp down on the wholesale side of Wall Street's business, to tighten capital requirements and to get on top of derivatives and the other kooky securities investment banks trade.

All good. But please don't ignore the retail end - that is, the way lenders and brokers do business every day with us consumers. That's a mess too. You've allowed these companies, including some of the very ones we're bailing out now, to do pretty much whatever they want to drain us of our money.

Even the most responsible and savvy borrowers among us have trouble avoiding the tricky fees and rate-hike triggers on our credit cards. You've allowed our kids to get sucked into the debt culture before they've even gotten a job to pay the bills.

And then there are the financial products that are just plain poison, like mortgages that homeowners can't possibly repay and loans with interest rates to rival what guys with names like Sammy Knuckles used to charge.

As we're seeing now, irresponsible lending doesn't just hurt the people who take the bait. It can undermine the whole economy.

We aren't saying that lenders shouldn't make a profit. And we aren't saying that we borrowers aren't responsible for our own choices. We just want transparency and safeguards against faulty financial products.

Here's what you should be working on:

Curb credit-card gotchas
We understand the basic bargain behind credit cards (or think we do). For the convenience of charging, we have to pay some interest. If we pay on time, we should get a lower rate because we've proven that there's little risk we won't pay back.

But if we miss payments, we'll pay more - and even get dinged with some penalties. The card issuers call this risk-based pricing. And whenever lawmakers discuss new regulations, issuers strenuously argue that this system must never be undermined, for the good of consumers.

Ken Clayton of the American Bankers Association says that if lenders aren't allowed to charge their riskier customers a penalty, "some people will lose access to credit at reasonable prices."
Well, sure. Of course lenders ought to be able to set rules for borrowers - the only trouble here is the complexity. It seems to us that card companies aren't pricing for risk so much as teasing us with one low rate and then building multiple traps into their contracts to get us to shell out more, no matter how creditworthy we are. After all, virtually anyone can occasionally incur a late fee.

For starters, there are contracts that stipulate that the terms of the loan can change "at any time, for any reason" - which makes us wonder what all the rest of the gobbledygook is there for.
Among the reasons a card lender might choose to hike our rates: We missed a payment owed to someone else. (The lenders' jargon for this is universal default.) And when we're hit with a new rate, it's generally applied not only to new purchases but to any outstanding balances.

Penalty fees have become an important part of the card lenders' business model. According to IndexCreditCards.com, the average late fee is up to $35; the fee for going over the credit limit is about the same. (And those charges accrue interest too.)

Bills are often mailed out uncomfortably close to the due date. Sometimes the deadline isn't just a date but a specific hour. You can even be charged when paying on time: A Washington Mutual card assesses a $15 fee for paying online on the due date.

And then there's the stuff that seems intentionally perplexing. Many cards, for example, offer tantalizing 0% rates on balance transfers while charging a higher rate on regular purchases.
If a customer doesn't pay off the balance transfer immediately, all the monthly payments go to that 0% loan while the balance for the other, higher-rate charges just compounds and compounds.

Another common trick is "double cycle" billing. Here's how it works: Say a cardholder with no previous balance charges $1,200 and pays off $500 when the bill is due. You might think that interest would be assessed only on the remaining $700.

And with some cards that's true. But with double-cycle cards, a customer would owe interest in the next billing period on $1,900 - first on the original $1,200 and then on the $700 left over.
It's tough enough for full-fledged grownups with steady incomes to navigate this credit-card maze. So it worries us when we see that credit-card companies are aggressively pulling in college students. If they're over 18, they don't need a parent's consent to sign up.

A 2008 survey of new college grads for the credit bureau TransUnion found that 24% start their adult lives with more than $5,000 in credit-card debt. Many students have no means of support other than their parents, scholarships or loans.

But if kids don't or can't repay, says Robert Manning, author of Credit Card Nation, lenders "send bill collectors after parents saying, 'Do you really want to ruin Sally's life over $6,000?'"

How to fix it: We're hopeful that change is coming. "A critical mass is building for reform," says Travis Plunkett, legislative director of the Consumer Federation of America (CFA). Last year the Federal Reserve, which regulates banks, proposed new rules and asked for public comments. An unprecedented 62,000 consumers wrote in.

The Fed's proposal is a good start. If chairman Ben Bernanke actually approves the new rules, they'll ban double-cycle billing, prohibit applying rate increases to old balances and force companies to consider a payment on time if received by 5 p.m. of the due date.

The Fed would also require card companies to apply payments above the minimum proportionally. So if a cardholder who owes $2,000 for new purchases at 19% and $3,000 for transfers at 0% made a payment of $500 over the minimum, the bank would have to apply $200 to the new purchases and $300 to the cash advance. How perfectly sensible.

If the Fed doesn't act or waters down its ideas, then Congress, it's up to you. The Credit Cardholders' Bill of Rights, sponsored by Carolyn Maloney, D-N.Y., passed the House in September.

It would do much of what the Fed proposed and then some. It would bar universal default and "any time, any reason" rate hikes and require card companies to send out bills 25 days in advance of the due date.

The measure would also cut down on surprises. Card companies would have to notify customers of any rate increase 45 days before it went into effect. That would give us more time to make other plans or shop around for a better rate.

In an ideal world, we'd like Congress to go further. If a card has a credit limit, the lender should enforce it, instead of letting the transaction go through and then spanking us with a big fine.

And lawmakers should forget about those complicated deadlines and require lenders to accept a payment if it's postmarked on the due date. If that's good enough for the IRS, it should be good enough for a card company.

But most important, we've really got to protect students. Manning proposes a common-sense solution: Those between ages 18 and 21 should be allowed to have credit, but only if they have some income. Student loans and bailouts from the Bank of Mom and Dad shouldn't count.

By Marlys Harris, Money Magazine editor-at-large
November 5, 2008: 9:47 AM ET