Fannie, Freddie ride foreclosure freeze tide

The SE Texas Record Nov. 26, 2008, 1:44am

WASHINGTON, D.C. (Legal Newsline)--As Capitol Hill remains under siege from all sides of America's faltering economy, pressure to stem the tide of foreclosures continued to make inroads as Fannie Mae and Freddie Mac became the latest to join the foreclosure freeze movement.

The Federal Housing Finance Agency, which seized the mortgage lending institutions in September, announced the suspension of all foreclosure and eviction proceedings between Nov. 26 and Jan. 9, 2009, in an effort to give its newly created rescue plan a chance to work.

In a statement released Nov. 20, Freddie Mac Chief Executive David Moffett said, "By delaying these foreclosure sales, the nation's servicers will have the opportunity to work with more borrowers who could qualify for a modification under the new plan."

The Streamlined Modification Plan announced by the Bush Administration on Tuesday allows for eligible homeowners with loans owned by Fannie or Freddie to rework their loans to a payment of 38 percent of their current income. This is done by reducing interest rates as low as 3 percent, reducing the value of the loan and extending the terms of the loan.

Homeowners who lose their homes between now and Nov. 26 will not get relief from this plan.

The program has significant limits.

Freddie and Fannie own only a small percentage of the country's delinquent loans. For starters, Freddie and Fannie sold a relatively few number of subprime loans. Also, many of their loans were sold as mortgage securities, thereby making them ineligible for this plan.

"The vast majority of what's going into foreclosure are not Fannie Freddie loans," Freddie Mac Spokesman Brad German said in published reports.

According to figures released by Deutsche Bank, roughly 80 percent of the outstanding troubled loans have already been sold to investors. Most of those loans aren't expected to be helped by this program.

"When the loan is chopped up into a million pieces and any investor can block a modification from happening, a program like this will only scratch the surface of the mortgage crisis," said Sen. Charles Schumer, D-N.Y.

What about the bailout?

While people at the FHFA called the new program a model for the future that others should follow, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said the plan "falls short of what is needed to achieve wide-scale modifications of distressed mortgages."

Bair again cited the need for some of the money from the $700 Congressional Bailout approved in October to be used for foreclosure mitigation and relief.

"We must also devote some of that money to fixing the front-end problem: too many unaffordable home loans," Bair said in a statement.

Lawmakers continued to question U.S. Treasury Secretary Henry Paulson for his decision last week to change the use of the $700 billion bailout approved by Congress from buying distressed mortgages as originally planned.

On Thursday, House Finance Committee Chairman Barney Frank, D-Mass., took Paulson to task for the change, which would have provided more direct relief to homeowners.

"The bill is replete with authorization to you, not simply to buy up mortgages, but in effect to do some spending -- because we are talking about writing them down," Frank said. "So the argument that, frankly, of all the changes that have come with the program, this -- this wouldn't be a change. This was the program. … the argument that this is not part of the program simply doesn't wash. … The bill couldn't have been clearer."

Frank reminded Paulson that the bill's intent was to reduce the number of foreclosures, not just stabilize financial lending institutions.

"It is nobody's view that we have been as successful as we need to be for the stake of the economy in reducing foreclosures," Frank told Paulson.

David Fiderer wrote on The Huffington Post that Paulson "ignored Congressional intent, and went off into an entirely different direction, allocating funds to bolster securitization of credit card receivables."

A free pass?

While Democrats continued to blame lenders for the rising tide of foreclosures -- more than 4 million American homeowners, or 9 percent of borrowers with a mortgage, were behind on payment in June, with numbers rising every month -- others are voicing concern that lenders are bearing no responsibility for their problems.

Fiscal conservatives were shocked that the new Freddie Fannie relief plan will only apply to borrowers who are 90 days late on their payments.

"Should you keep paying your mortgage," syndicated columnist Kathleen Pender wrote Thursday. "If you have significant equity in your home, absolutely. If you don't it's getting harder to answer that question, especially when our government keeps giving people who owe more than there are worth so many reasons not to pay."

Peter Schiff, president of Euro Pacific Capital, said he believes that the latest programs will only increase the number of people who stop making their payments, which could significantly increase the cost of providing assistance.

"This is a once-in-a-lifetime opportunity," Schiff said in published reports. "People are going to feel like complete morons if they don't participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn't afford."

Freddie and Fannie join a prestigious list of financial institutions currently shifting toward some version of loan modification program, as the staggering weight of financial losses from the housing crisis continues to take a toll on the bottom line.

Citigroup started halting foreclosures for borrowers who stand a good chance of making lowered mortgage payments. The news followed with further drop in Citigroup stock prices, below $4 a share. Analysts on Friday said the bank may have to soon start selling off its best assets or consider a merger.

JPMorgan Chase & Co. expanded its mortgage modification program. Thank bank has already modified about $40 billion in mortgages this year.

Bank of America, under terms of its settlement with California and Illinois over Countrywide Financial Corp.'s predatory lending practices, will begin its loan modification plan on Dec. 1.

They expect to modify an estimated 400,000 Countrywide loans. Bank of America purchased Countrywide in July.

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