Wrangling over foreclosures

Each new plan draws a chorus of criticism, and the crisis may grow if efforts made so far don't work

It seems as if no one in Washington can get the foreclosure fix just right.

In recent days, Fannie Mae and Freddie Mac, the mortgage giants that are now run by the federal government, and giant lenders such as Citigroup and JPMorgan Chase said they would redo loans to keep hundreds of thousands of troubled borrowers in their homes.

But each new proposal draws a chorus of criticism: Some are too modest, others unaffordable.

One prominent critic is Shelia Bair, chairwoman of the Federal Deposit Insurance Corp., who directed her remarks yesterday at efforts by her colleagues in the Bush administration to have Fannie Mae and Freddie Mac adjust loans of delinquent borrowers to more affordable levels.

Bair said the Freddie and Fannie effort is too modest, because it does not include other important holders in the mortgage sector and is missing many critical features.

"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," Bair said in a statement.

"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."

The ongoing debate comes despite numerous other efforts by the government and lenders to solve the foreclosure crisis - one that is predicted to grow if these plans don't work. An estimated 7.3 million borrowers are expected to default on their first mortgages between 2008 and 2010, and 4.3 million are expected to lose their homes, according to Moody's Economy.com.

Freddie and Fannie combined own or guarantee almost 31 million mortgages. The plan disclosed yesterday by the Federal Housing Finance Agency, which seized the companies in September, would use a mix of options, such as reducing interest rates, deferring principal, or extending the loan terms, to bring monthly payments to no more than 38 percent of monthly gross income.

To qualify, borrowers would have to have missed at least three mortgage payments, still live in their homes, and not be seeking bankruptcy protection. Distressed homeowners must also certify that their financial circumstances have changed and that they did not purposefully default in order to get a better loan.

Even the head of the Federal Housing Finance Agency, James B. Lockhart, acknowledged the proposal would affect a fraction of the delinquent loans in the nation. Fannie Mae and Freddie Mac have about 20 percent of seriously delinquent loans, Lockhart said, while 60 percent of the delinquent loans are held by investors who control them through mortgage-backed securities.

Lockhart yesterday called on such investors "to rapidly adopt" the Freddie and Fannie program. "Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values," he said.

Also yesterday, Citigroup said it would help an estimated 500,000 borrowers avoid foreclosure and extend a moratorium on foreclosures for eligible borrowers. But separately Citigroup services an additional 5 million mortgages it does not own. The bank said it would try to work with the holders of those loans, typically investors, to help homeowners.

But like other loan servicers, Citigroup does not have unilateral authority to modify troubled loans that have been securitized, that is, sold off in investment pools.

"It seems the core problem is working with securitized loans and how to get the servicers to have consistent treatment," said Sharon Price, director of policy for the National Housing Conference. "That is the question that is hanging out there."

Because of the key place they occupy in the mortgage industry food chain, those investors, and the loan servicing companies they hire, are coming under increasing scrutiny in Washington.

Today, US Representative Barney Frank, chairman of the House Committee on Financial Services, is expected to detail a measure that would give loan servicers authority to modify mortgages owned by investors.

"We need to pass legislation totally restructuring this whole industry of servicing," Frank, a Massachusetts Democrat, said yesterday.

"We are going to see more and more efforts to reduce foreclosures in various ways."

The Freddie and Fannie program was also criticized by housing activist Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America in Jamaica Plain.

He said the plan would prompt homeowners to default on their loans to ask for help and that the 38 percent income benchmark is higher than that used by other government agencies.

The FDIC, for example, will rework monthly payments of loans it controls to as low as 31 percent of household income.

"The news is that they have recognized there is a crisis and the previous solutions don't work," Marks said.

"The bad news is this will do virtually nothing for the at-risk homeowners. It is just pure publicity in the worst form, raising false expectations."

Jenifer McKim can be reached at jmckim@globe.com.