In an aggressive move targeting the root cause of the global financial crisis, Citigroup Inc. plans to announce Tuesday that it is offering to modify the terms of as much as $20 billion in mortgages for borrowers who are current on their loan payments but at risk of falling behind.
The push by the New York company's CitiMortgage unit marks the latest effort by a financial institution to help ailing homeowners, which also can help lenders reduce loan losses. Citigroup's program includes subprime borrowers and those with good credit who took out prime loans, a sign the bank sees mortgage delinquencies and foreclosures are spreading.
"The real problem in the U.S. now is increasing unemployment," said CitiMortgage Chief Executive Sanjiv Das. "We are finding that people across the board need help."
The company ultimately expects to 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, CitiMortgage said.
CitiMortgage is calling borrowers primarily in parts of the U.S. where the economy is weak and offering to modify their mortgages if they are facing financial difficulty. Borrowers who ask for help can get their loan reworked if their mortgage-related payments exceed 40% of their income. CitiMortgage may lower that threshold over the coming months, Mr. Das said.
Modifications include lowering the interest rate, extending the term of the loan and, as a last resort, reducing the amount of the debt. CitiMortgage has been testing the program for about three months and loan payments are being reduced by about 40% on average.
A Citigroup spokesman declined to comment on the loan-modification's potential impact on earnings. "We expect the actions will have a positive effect over the long term as they will reduce credit losses," the spokesman said.
As the federal government pours taxpayer-funded capital into distressed financial institutions, banks have come under enormous political pressure to slow foreclosures and help stabilize the housing market, which many economists believe is essential for an economic recovery.
But such efforts are fraught with complications. Banks want to make sure, for example, that loan-modification programs don't encourage borrowers who can afford to pay their mortgages to default just to get better terms.
Other banks that have announced loan-modification efforts include J.P. Morgan Chase & Co. and Bank of America Corp. The Federal Deposit Insurance Corp. has been reaching out to financially strapped borrowers whose mortgages are serviced by IndyMac Bancorp. The Pasadena, Calif., company's banking operations were taken over by the federal government in July.
Such moves will help keep some borrowers in their homes but won't be enough to stem the rising tide of foreclosures, said Mark Zandi, chief economist of Moody's Economy.com. "The foreclosure crisis is now much too large to be sufficiently addressed by mortgage servicers and owners," he said. "The federal government will need to come forward with a very large and comprehensive foreclosure-mitigation plan."
Nationwide, 8.5 million homeowners are expected to default on their mortgages between 2008 and 2010, according to Moody's Economy.com, with some 5.2 million of them expected to lose their homes.
The actions taken so far by Citigroup and other institutions are limited because lenders feel they have the greatest discretion to modify loans that they own. It is much more difficult to restructure mortgages bundled and packaged into securities that now are owned by investors who often have divergent interests. These types of mortgages account for the majority of those issued in recent years.
CitiMortgage owns 1.5 million mortgages totaling $175 billion and services another five million loans totaling $600 billion for investors. It is currently in discussions with investors about applying the new program to loans the company services but doesn't own. Some 4.6% of the mortgages owned by Citigroup were at least 90 days past due at the end of the third quarter.
CitiMortgage also is halting foreclosures for about 16,000 borrowers who are behind on their loan payments but are working with the company on a loan modification. About 10,000 of those borrowers live in their homes and are likely to get their mortgage terms reworked, while about 6,000 are investors, according to the company.
While the lender's program is nationwide, it will focus on areas in six states — Arizona, California, Florida, Indiana, Michigan and Ohio — where unemployment rates are higher than the national average and home prices are falling sharply.
CitiMortgage plans to reach out to all mortgage holders in the targeted areas, rather than wait to be contacted, because many struggling homeowners don't know what to do and are reluctant to contact their mortgage company for fear that their credit score will drop, Mr. Das said.
If a loan is modified before it becomes delinquent, it will be counted as current so won't affect the borrower's credit rating, according to bank officials.