Many borrowers facing foreclosure would like to ask their lenders to hold off for a while – give them just a little time.
Now, some of those troubled borrowers – especially people who are three months late on their mortgage payments – may get that opportunity.
On Tuesday, Treasury Secretary Henry Paulson announced a pilot project, Project Lifeline, which will give borrowers with all types of mortgages 30 days to negotiate with six major mortgage servicers that represent half of the mortgage market. In those 30 days, foreclosure proceedings will be suspended.
"This is an important new initiative designed to reach not only subprime borrowers but all 90-day delinquent borrowers with a step-by-step approach to find individual solutions to individual problems," said Secretary Paulson.
Yet critics of the administration would like to see still more action since foreclosure rates continue to rise.
Congressional critics also had mixed views. Sen. Charles Schumer (D) of New York praised the new initiative but added in a statement that mortgage lenders need to take the next step "and perform workouts that cut down the borrower's debt."
Senator Schumer would prefer to have banks reduce the value of the loans they've made to the market rate. Thirty percent of homeowners who borrowed over the past two years owe more money on their homes than they are worth, he said.
"Congress is working to give bankruptcy judges the ability to trim borrower debt, but that same option should be available to homeowners before they have to declare bankruptcy. Americans shouldn't have to go to court to get their loan fixed," said Schumer.
Project Lifeline is aimed at homeowners who risk losing their homes but have not yet addressed the problem, Paulson said. "Perhaps they are hoping to find a way to get current on their mortgage payments, or perhaps they don't think any solution is possible," he said. "We hope they will reach out for help, especially since the foreclosure process is now upon them."
Groups working with challenged homeowners welcomed the effort. "If you can remove from a person the stress of a pending foreclosure, it's a very good idea," says Doug Robinson, a spokesman for Neighborhood Works, a national nonprofit that works with various communities. "It gives them an opportunity to seek counselors, get their paperwork together, and maybe make an offer to refinance a loan or get some more time to get their home sold. Anything that stops a foreclosure from proceeding will be a very good thing."
Project Lifeline is another incremental step that the administration has taken with the mortgage industry to try to ameliorate the burst of the housing bubble. Late last year, Paulson shepherded negotiations that resulted in a program called Hope Now, which allowed subprime borrowers to negotiate to freeze their teaser rates for five years. That effort now encompasses 94 percent of the companies that service mortgages, he said.
According to Paulson, a hot line established by the Hope Now alliance is now getting 4,000 calls a day, up from 625 when it started. The loan modification rate in the fourth quarter has doubled over what it was in the third quarter, he said.
But Mr. Robinson says the efforts are moving more slowly than anticipated. "Right now the industry is still trying to put together a uniform framework to evaluate borrowers who are eligible and to streamline the process," he says. "Those who speak to people in financial trouble every day would like to see things move faster."
Another incremental change will increase the size of loans that banks can resell to Fannie Mae, Freddie Mac, and the Federal Housing Administration. That's part of the economic stimulus package just passed by Congress. The size of the loans will go from $417,000 to as much as $729,750.