FANNIE MAE, FREDDIE MAC, NOW CITIGROUP Willing to Modify Some Mortgage Loans. Should They?
MANY DEBATE WHETHER FED SHOULD BE INVOLVED IN LOAN MODIFICATION, WHETHER BANKS SHOULD MODIFY VOLUNTARILY, OR WHETHER BORROWERS SHOULD BE HELPED AT ALL?
As the number of distressed homeowners, and those actually facing foreclosure, continues unabated, several major banks have stepped up efforts to help some of its borrowers.
Recently, Bank of America agreed to modify many of the risky Option ARM Loans originally written by its recently-acquired Countrywide Home Loans business by reducing the rates on these loans - but not the outstanding principal balance - to as low as 2.5% in some cases, to reduce the chance these loans will go into foreclosure.
IndyMac Bank of California, recently seized by the Federal Deposit Insurance Corporation, has stalled all of its foreclosures, instead opting more aggressively for workout arrangements with its delinquent home borrowers.
Late yesterday, Citigroup introduced a $20 Billion loan modification program targeted at those in danger of falling behind in their mortgage payments, but current at the present time. Foreclosures would be stalled as long as borrowers are making a good faith attempt to renegotiate their loan into a more affordable loan product requiring monthly house payments no more than 40% of their monthly family income.
Announced earlier today, Fannie Mae and Freddie Mac, formerly government-sponsored loan investors and guarantors, now operating directly as entities of the U.S. Government, will attempt workout arrangements with certain borrowers at least three months behind on their payments. Qualifying borrowers must still live in their homes as their principal residence, must not have filed for bankruptcy protection, must owe at least 90% of the home's present market value, and be currently employed.
Opponents of such plans feel they might actually ENCOURAGE loan delinquency, in order to get out from under too much debt they willingly took on. They contend that individual borrowers should not be rewarded for such bad judgment.
Those favoring the plan point to the likely 8.5 Million Homeowners going into default between now and 2010, according to research by Moodys.com, and the massive strain these potential foreclosures will put on the U.S. Housing and Credit Markets, as well as the likely chilling effect that thousands of new, foreclosed, boarded-up homes will have on the livability of neighborhoods across the country.
Although the debate continues, it is clear this critical problem will continue well into the first months of the Obama Administration beginning in January. Any specific or revised direction Obama might take is as yet uncertain.
Read Emily Friedlander's post on the Wall Street Journal "Developments" Blog for her thoughts and many reader comments. As you might imagine, those writing comments are spirited, and a bit frustrated!
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