The Fine Print of the Foreclosure Fight

You may have read about the latest public and private efforts to help financially distressed homeowners cope with their mortgage payments. But you might not have caught key details that could have an effect on you or people you know -- now or in the months ahead.

One of the most ambitious mass-market "loan modification" programs was outlined Nov. 11 by the Federal Housing Finance Agency -- overseer of Fannie Mae and Freddie Mac -- along with the 33 banks and mortgage servicers that make up the private-sector Hope Now Alliance.

The program, which is scheduled to start Dec. 15, is aimed at thousands of subprime and other borrowers who are seriously behind on payments -- three months or more -- and are slipping fast toward foreclosure. To be eligible for intervention, owners need to document that they can handle mortgage payments with up to 38 percent of their monthly gross income.

They also need to demonstrate that they have experienced some form of financial reversal that made them delinquent on their payments, and prove that they did not intentionally go into default just to get better terms.

Borrowers may qualify for sharply reduced interest rates, deferrals of principal payments or extended loan terms -- whatever combination is necessary to get them an affordable payment with their current income.

Even though the formal kickoff isn't until next month, participating lenders say they want to hear as soon as possible from potential beneficiaries. If homeowners can't connect directly, they can work through the Hope Now Alliance (http://www.hopenow.com) or through the Department of Housing and Urban Development (http://www.hud.gov/foreclosure). Hope Now also has a toll-free hot line -- 1-888-995-HOPE -- staffed by counselors.

The same day the new federally assisted mass-modifications effort was announced, one of the largest lenders and servicers, Citicorp, unveiled a program designed to catch at-risk homeowners before they fall behind. Beginning this month, Citicorp will reach out to an estimated 500,000 customers who are not currently delinquent but who appear to be at risk -- either because their credit files show telltale signs of financial stress or because their homes are in markets Citicorp classifies as facing serious economic strains and job losses in the coming year.

The bank said it expects to complete up to $20 billion in "pre-emptive" mortgage modifications in the next six months using rate reductions, term extensions and even reductions in principal debt balances. Citicorp also intends to halt all foreclosures in the coming months for owners who have sufficient income to handle modified monthly loan payments at some level, and who are working in good faith with the bank to save their house.

While the two new programs target starkly different segments of homeowners -- the walking wounded and those heading for the line of fire -- both make use of a streamlined, formula-based systematic approach for mass modifications advocated by FDIC Chairman Sheila Bair.

Although most mortgage industry executives and economists believe that today's foreclosure crisis is so serious that only wholesale remedial approaches can prevent home losses from piling up, not everyone agrees with the new programs or the loan modification options they provide.

For example, some are critical of the government's requirement for three months of delinquency, arguing that it could have corrosive effects on borrowers who are straining to keep up with payments but are still making them on time. Rob Chrisman, senior vice president and director of capital markets for Residential Pacific Mortgage in Walnut Creek, Calif., said he talked with a loan agent who commented, "All I have to do is stop making mortgage payments and I can get a 3 percent rate? Sweet! Who needs a mortgage broker?"

Other critics argue that mass modifications are bound to produce high rates of recidivism -- essentially waves of remodifications or foreclosures in the coming years as homeowners with hastily modified mortgages find that they cannot afford even those lower rates and better terms. That simply pushes the problem down the road, rather than solving it.

"If you're doing mass modifications without careful, individual reunderwriting," said Joseph Smith, president and chief executive of Default Mitigation Management of Newport, Ky., "you're just going to end up having to do the same thing again."

Bottom line for borrowers: Pursue a loan modification if you qualify and need one. But talk with your servicer to make sure that the revised terms you're signing up for are realistic for your long-range economic situation and not likely to be just a temporary patch.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.