The government's massive $750 billion bailout plan was supposed to include loan workout provisions. Those provisions are beginning to take shape, based on recent modified loan programs released by Fannie Mae, Freddie Mac, and some private lenders. The big question remains: Will these efforts actually help homeowners?

The term "loan modification" has suddenly entered the financial vernacular, courtesy of the subprime mortgage crisis. Homeowners in foreclosure are desperate for a modified refinance or some type of modified mortgage loan, and they're looking to the public and private sector for help.

No direct intervention

Homeowners looking for a modified mortgage refinance had hoped the bailout program would yield direct intervention. The Bush Administration, however, appears to be singing a different tune.

The recently released plan sets guidelines on the type of Fannie Mae or Freddie Mac loan that can be modified. To qualify for a loan workout program, the homeowner must be 90 days or more delinquent in a mortgage payment, live in the home, and owe at least 90 percent of the home's current value. If the homeowner has filed for bankruptcy, he's ineligible. The goal of the government's plan is to use lower interest rates and longer repayment schedules to bring payments below 38 percent of a household's monthly income.

Skeptics believe that the government's approach is inherently flawed. The program, for example, only applies to Fannie Mae and Freddie Mac mortgages, which include just a small percentage of the many subprime loans floating in the marketplace. These are the ones that are the toxic paper crippling the system, but it's the government's hope that the private sector will handle those debts on its own. The plan also doesn't detail any action regarding securitized loans. This is likely due to the complicated, nearly impossible task of trying to untangle these securities to weed out the bad mortgages.

The 90-day provision is also being questioned. Will homeowners let their mortgages go delinquent for three months in order to cash in on the lower rates?

Private sector plans

Many of the nation's largest private mortgage lenders have adopted loan workout programs that are similar to the government's guidelines. In addition to reducing the delinquent mortgage holder's monthly payment, Citigroup, for example, announced that it will extend its foreclosure moratorium practice. JPMorgan Chase will pursue many of the same practices and, like other lenders, will establish counseling centers and add staff to help homeowners work through the process. Bank of America, which purchased Countrywide during the peak of the subprime debacle, is following suit. It's also promising not to charge modification fees and waving subprime mortgage options.

Big banks will take a beating during the loan modification process, and many pundits believe that's the main reason many of them aren't eager to resume lending. They may be using the government bailout money to get through the current bad market. We can only hope that this global meltdown will be a lesson never forgotten.

Published on December 13, 2008