WASHINGTON — Federal regulators and industry representatives unveiled yet another plan Tuesday aimed at streamlining loan modifications, and they carefully noted they had worked closely with the Federal Deposit Insurance Corp.
There was just one problem: FDIC Chairman Sheila Bair raised significant concerns, saying the plan "falls short of what is needed to achieve wide-scale modifications of distressed mortgages."
Lawmakers, too, argued that the plan was too little, too late, and they called on the Bush administration to take broader steps, including offering loan guarantees to institutions that agree to a government-created modification program.
"This should not be considered a replacement for the guarantee program authorized by the recently enacted financial rescue law," said Senate Banking Committee Chairman Chris Dodd.
He was seconded by Sen. Charles Schumer, a member of the Senate leadership.
"These voluntary plans sound nice, but they don't do the job," Sen. Schumer said.
The crux of the latest effort, spearheaded by the Hope Now coalition, the government-sponsored enterprises, the Treasury Department, and the Federal Housing Finance Agency, would target delinquent loans owned by Fannie Mae and Freddie Mac. Under the plan, Fannie and Freddie would agree to modifications from servicers by reducing borrowers' mortgage-debt-to-income ratio to 38% on loans with a loan-to-value ratio of at least 90%.
To qualify, borrowers would have to be at least three months past due.
Servicers would use their discretion to alter the interest rate, loan terms, or principal. Income verification would have to be documented, and the loans would be reamortized over 40 years.
The interest rate could be reduced to no less than 3% for five years and could be followed by increases of no more than 1 percentage point a year afterward.
FHFA Director James Lockhart said the program was based in part on the modification program at IndyMac Bancorp Inc., which the FDIC assumed when the thrift company collapsed July 11.
Mr. Lockhart said "we have drawn on the FDIC's experience and assistance, and have greatly benefited from the FDIC's input."
"The program creates a fast-track method of getting troubled borrowers to an affordable monthly payment where 'affordable' is defined as a first mortgage payment, including homeowner association dues, of no more than 38% of the household's monthly gross income," he said.
Treasury officials also praised the plan, saying the industry is helping to modify about 200,000 loans a month.
"The adoption of this streamlined modification framework is an additional tool that servicers will now have to help avoid preventable foreclosures," Neel Kashkari, the Treasury's assistant secretary for financial stability, said at a press conference unveiling the latest Hope Now program. "This framework will not only help those homeowners who receive a streamlined modification. It will also further address servicer capacity concerns by freeing up resources, helping ensure that borrowers do not fall through the cracks because servicers aren't able to get to them."
But Ms. Bair and many others were already raising doubts about the plan.
In a press release, Ms. Bair said she was pleased that the plan drew inspiration from the IndyMac program.
However, "there are questions that remain about implementation," she said. "These include allowing extended amortization prior to interest rate reductions, whether payment increases are capped for the life of the loan, the use of higher interest rate caps, and sufficiently granular reporting to determine compliance and results."
Many consumer groups, and even regulators like Comptroller of the Currency John Dugan, have doubted Hope Now's claims that it has helped more than 2.5 million borrowers.
"You can never believe anything that Hope Now says, because they have a track record of deception and lies," said Bruce Marks, the chief executive officer of the Neighborhood Assistance Corp. of America. "All their numbers that they have put out have been evaluated as not being accurate."
Like many others, Mr. Marks said the program's effectiveness was also undercut by the fact that homeowners would have to be more than 90 days delinquent.
"In order to qualify, you have to destroy your finances," he said. "If you are doing everything in your power to make your mortgage payment, you don't qualify. The only way you can qualify is if you are 90 days or more late. They are telling people not to make their mortgage payment."
Critics also said the plan does not deal with private-label mortgage-backed securities, where many borrowers' loans are held.
"No amount of incentives for investors can change the fact that a program like this will only really work if Fannie and Freddie hold the whole loan, which is true in too few cases," Sen. Schumer said. "When the loan is chopped up into a million pieces, and any investor can block a modification from happening, a program like this will only scratch the surface of the mortgage crisis."
Mr. Lockhart acknowledged as much Tuesday but said he hoped private servicers and investors would follow suit with similar programs.
"I ask the private-label MBS servicers and investors to rapidly adopt this program as the industry standard," he said at the press conference.
The inclusion of Fannie and Freddie is a critical difference between the latest plan and earlier modification efforts announced by Hope Now. Consumer groups have seen Fannie in particular as an obstacle to modifications, even after the government seized it Sept. 7.
Bank of America Corp., JPMorgan Chase & Co., and Citigroup Inc., meanwhile, have announced their own modification plans for loans they hold in portfolio.
Citigroup announced late Tuesday it would modify the terms of as much as $20 billion in mortgages for borrowers who are current on their mortgages but may fall behind. Modifications could include lowering the interest rate, extending the term of the loan or reducing principal. The company said it could reach 500,000 customers whose mortgages it owns. Roughly 130,000 of those borrowers are likely to see a reduction in their monthly loan payments, Citi said.
Industry representatives defended the Hope Now program, arguing that it would be useful.
"This is an effort to provide another tool, another set of methodologies that might help head off some of those foreclosures," said Robert Davis, an executive vice president for the American Bankers Association. "We aren't sure how much it's going to transform the problem and be an ultimate solution, but it's another helpful tool and helps establish industry guidelines and benchmarks that are more flexible."
More lawmaker responses to the plan are likely today as the House Financial Services Committee holds a hearing on modification efforts. The hearing will include representatives of BofA, JPMorgan Chase & Co., the Managed Funds Association, and the American Securitization Forum.