Homeowners Bailout

The governement administration is set to unveil on today a potentially extensive new program to modify mortgages and help at-risk homeowners and stabilize the battered real estate market.The plan centers on Fannie Mae and Freddie Mac, which between them own or back about $5 trillion in loans. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages. While a number of major banks, including Citigroup, JPMorgan, Chase and Bank of America,have announced loan modifications programs in recent weeks, they hold only a fraction of the nation's mortgages compared with Fannie and Freddie.The government will establish standards for loan modifications and provide guarantees for loans meeting those standards so that unaffordable loans could be converted into loans that are sustainable over the long term. Most of the mortgage modification programs announced by banks so far try to cap the payments of homeowners at risk of losing their homes at a level they can afford, typically about 34% to 40% of their income, through lower interest rates, longer repayment schedules or reductions in loan balances. There are reports that the Fannie-Freddie plan will cap payment at the 38% level. It is clearly in the interest of the mortgage finance firms as well as banks to take steps to halt foreclosures. The market is already flooded with far more new and existing homes for sale than there are buyers, and foreclosures will only further drive down home prices and lead to more foreclosures in the future. Forecasts are saying that even with loan modification programs, 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale, and another 1.9 million are projected to lose their homes in 2009. On Monday, Fannie reported a $29 billion loss in the third quarter. The company also reported sharp increases in loan default rates and the amount it is setting aside for future loan losses.