Federal plan could aid troubled homeowners

WEST COVINA, Nov 12, 2008 (San Gabriel Valley Tribune - McClatchy-Tribune Information Services via COMTEX) -- FRE | Quote | Chart | News | PowerRating -- The federal government on Tuesday piggybacked on the actions of several banks -- including Pasadena-based IndyMac -- and jumped in to the loan restructuring business to save hundreds of thousands of troubled homeowners from foreclosure.

But opinions were mixed as to whether reducing interest rates and giving longer terms for loans guaranteed by Freddie Mac and Fannie Mae were the right approaches.

The federal government's plan, announced by federal officials and Fannie Mae and Freddie Mac, would allow borrowers at least three months behind on their loans to qualify for reduced interest rates. The Fed's actions also would allow borrowers to extend their loan terms to make their payments more affordable.

"I think I can say in the short-run with some confidence that it's a good idea," said Gary Painter, associate professor of policy, planning and development at USC. "There's such a stream of foreclosures ... certain communities could experience a real undermining of their neighborhoods."

Fannie and Freddie own or guarantee nearly 31 million U.S. mortgages, or about six of every 10. And more than 4 million American homeowners, or 9 percent of borrowers with a mortgage, were either behind on their payments or in foreclosure at the end of June, according to the most recent data from the Mortgage Bankers Association.

"(The government's plan) will (prevent) those who still have jobs and ... with mortgages from just walking away from their homes," Painter said.

To qualify for the plan, which takes effect Dec. 15, borrowers would get help in several ways: The interest rate on their loan would be reduced so that they would not pay more than 38 percent of their gross income on housing expenses. Another option is for loans to be extended to 40 years from 30, and for some of the principal to be deferred, interest-free.

But the flip side of the plan could be hazardous in the long run, Painter said.

"The long-term issue with these types of bailouts is that 10 years from now that (buyers) will think it's still OK to buy a house with substantial price risk because the government might step in" to back your mortgage, Painter said.

Others echoed the flip-side scenario.

"I'm not sure creating more debt is the solution," said Tom Adams, from Century 21 Adams & Barnes in Monrovia.

The housing crisis and the ensuing credit squeeze are at the heart of the nation's economic woes.

The subprime mortgages that led many to buy homes at adjustable interest rates resulted in the collapse of massive Wall Street investments when the value of those properties dipped. Hundreds of thousands of those borrowers -- many in Los Angeles and the Inland Empire -- were left with mortgages and high interest rates they could not afford.

And while lenders and Congress have beefed up aid to ailing homeowners over the last year, their efforts have not kept up with the worst housing recession in decades.

Complicating matters is that the vast majority of troubled loans were packaged into complex investments that have proven difficult to unravel. Many of those slices have been sold around the world.

Tuesday's action, coupled with the efforts of other banks, is an attempt to fix that crisis by essentially making non-performing loans performing, said Sven Arndt, professor of money, credit and trade at Claremont McKenna College.

"Now ... they're all performing, because the government is going to make them perform," Arndt said.

The Fed's action comes on the heels of other banks' attempts to straighten out the mess.

After the Federal Deposit Insurance Corp. in July took over IndyMac, it started a program to lower payments for struggling borrowers with mortgages.

But if the FDIC's experience with IndyMac is any indication, it could be hard for the government to reach the troubled homeowners in the first place.

Other bank actions include CitiGroup's announcement late Monday that it is halting foreclosures for borrowers who live in their homes, have decent standing and have a good chance of making lowered mortgage payments.

Late in October, JPMorgan Chase & Co. expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 customers.

Bank of America has said that starting Dec. 1, it will modify an estimated 400,000 loans held by newly acquired Countrywide Financial Corp.

The Fed's action Tuesday didn't come quick enough for Troy Courtney, a San Francisco police officer. He had to move from his home in Mill Valley after several failed attempts at loan modification.

"I feel like I missed the boat," he said. "I'm just mad at the whole system."

The Associated Press contributed to this report.

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