Mortgage giants' plan would stem foreclosures

US foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record. (Ethan Miller/Getty Images)

WASHINGTON - Fannie Mae, Freddie Mac, and housing industry officials plan a new mortgage modification program designed to cut payments for hundreds of thousands of homeowners facing foreclosure, according to people briefed on the matter.

Under the proposal, mortgage servicers will work with borrowers to reduce monthly payments to 38 percent of their income, a level considered a threshold for affordability, using a combination of lower principal, interest-rate reductions, and extensions, the people said.

The initiative would expand efforts by the Hope Now Alliance, a group of investors, advocacy groups, and mortgage lenders and servicers such as Citigroup Inc. and Wells Fargo & Co. that Treasury Secretary Henry Paulson helped create last year.

"If housing doesn't get stabilized, it's really going to continue to bleed the economy," said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pa.

Details of the plan, which won't include money from the Treasury's $700 billion bank rescue, are being finalized, the people said. An announcement could come today. The House Financial Services Committee has scheduled a hearing on loan modifications for tomorrow.

The Federal Housing Finance Agency has signed off on the program and the Treasury has been tracking its progress, the people said.

President-elect Barack Obama last week called on the Treasury and other government agencies to "use the substantial authority that they already have to help families avoid foreclosure and stay in their homes."

Although the new program may help some homeowners avoid foreclosure, it won't alleviate all of the strain in the housing market. Lawmakers have pressed the administration to step up its efforts, and Federal Deposit Insurance Corp. chairwoman Sheila Bair has pushed for a bigger government role in loan workouts that would use some of the money from a $700 billion bank rescue program at the Treasury.

Under the latest industry plan, homeowners will have to apply for the program, and their loan modifications won't become final until they have made three consecutive payments. Their new monthly payment will include all of their monthly housing costs, such as taxes and even condo payments, one person said.