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New effort to modify at-risk home loans

A housing alliance, including some of the nation's biggest lenders, is working with mortgage-service companies to modify loans rather than let them fall into foreclosure.

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For the first time, the new guidelines establish a common, streamlined timetable that will be used by each participating mortgage servicer when working with a homeowner to prevent a foreclosure, the group says.

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The guidelines involve a common set of principles on alternatives such as loan modifications or repayment plans – and the treatment of second-mortgage holders.

In recent months, they have been expanding the number of loan "workouts," but the effort hasn't kept pace with the rising tide of foreclosures. A rising share of the workouts involve "loan modifications," such as a reduction of interest rate or loan balance. Still, these "loan mods" represent less than half of all workouts.

In so-called "piggyback" loans, a borrower owes the most to one primary lender, and a smaller amount on a second mortgage. Together, the two loans may represent 100 percent of the home's purchase price.

"We make an industrywide commitment that second lien mortgages will not stand in the way" of loan workouts, Steve Bartlett, President and CEO of the Financial Services Roundtable, said in a conference call with reporters.

Under the plan, participating lenders who hold second liens will allow loan modifications to move forward under specific new parameters. Those second lenders will not see a reduction in the amount they are owed and will retain their status of second in line to the primary lender, the group said.

Another goal of the new guidelines is to clarify the options available, streamlining discussions and encouraging borrowers who may be reluctant to talk with banks.

"My own view is [that the result] will be at least a 20 percent increase in the number of homeowners assisted," Mr. Bartlett said.

Representatives of Hope Now said their moves complement, rather than compete, with possible legislation in Congress to encourage more loan refinancings guaranteed by the Federal Housing Administration.

Data on the magnitude of the foreclosure crisis – and the efforts to resolve it – are hard to pin down, says Ms. Essene, the analyst in Cambridge.

But according to data gathered by Hope Now, the industry worked with borrowers on 183,000 loan workouts in April, up from 151,000 last December.

But the effort hasn't kept pace with the number of loans entering foreclosure, which rose to 204,000 in April, the group says.

A rising share of the workouts involve a reduction of interest rate or loan balance. Still, such loan modifications represent less than half of all workouts.

Repayment plans, still the bulk of workouts as of April, leave a high risk of foreclosure.

That leaves the question of whether additional policy efforts may be needed to deal with the housing crunch.

"Congress could do more," and may need to do more, Essene says.