Struggling homeowners might qualify for payment reductions

Monday, November 24, 2008 | 6:48 p.m. CST; updated 9:41 a.m. CST, Thursday, December 11, 2008

WASHINGTON — The U.S. government's multibillion-dollar bailout of Citigroup Inc. requires the giant financial services company to lower loan rates for struggling homebuyers who are behind on their mortgage payments.

Borrowers whose loans are in a $306 billion pool of Citigroup assets that have new government backing might qualify for a reduction on their payment to 38 percent of their monthly income.

As of late Monday, neither the government nor Citigroup could provide an estimate on how many borrowers might qualify for assistance. If the bulk of those assets are mortgages or securities based on them, potentially hundreds of thousands of borrowers could be helped.

"We are reviewing the mortgage portfolio to determine the universe of potential eligible borrowers for modifications," Federal Deposit Insurance Corp. spokesman Andrew Gray said.

The loan modification requirement was part of a complex deal worked out between federal regulators and Citigroup over the weekend. It is based on a model created by the FDIC and already applied to IndyMac Bank, a failed savings and loan in Pasadena, Calif.

The government has not released a breakdown of assets in the Citigroup pool. Regulators have described it as "loans and securities backed by residential and commercial real estate and other such assets."

Under the agreement, the Treasury Department will make a direct investment in the bank, plus guarantee against the "possibility of unusually large losses" in the $306 billion pool. Citigroup will assume the first $29 billion in losses. Beyond that, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent.

The Citigroup arrangement will not include any federal loan guarantees, Gray said. The IndyMac plan doesn't have those government guarantees either.

Under the IndyMac plan, mortgage payments are lowered to 38 percent or less of a homeowner's monthly income for qualified applicants. To reach the target payment, the lending rate could drop to as low as 3 percent and stay there for five years. After five years, interest rates rise annually to the national market survey rate, where it is capped.

As an example, the FDIC cites a borrower with an outstanding principal balance of $647,144 who has fallen behind on her monthly payments. The FDIC drops the borrower's interest rate to 3 percent for five years. That lowers the monthly payment from $3,305 to $2,504. The rate rises slowly over the next five years, requiring a $3,770 payment by year nine at the market rate.

So what's the catch? By spreading interest payments over a longer period, and foregoing payments on principal, the buyer won't own the home at the end of the 30-year term. The sample borrower in the FDIC case would still end up owing a $335,807 at the end of 30 years. The borrower would be left to take out another loan.

Not all borrowers qualify. The loan modification must net the lender more money than foreclosure would. Lenders can sometimes lose up to 40 percent of a loan's value through foreclosure.

The plan has gotten plenty of attention in Washington as lawmakers and President-elect Barack Obama have called for a more systematic approach to stem the tide of mortgage foreclosures.

Data from RealtyTrac Inc. show that foreclosures surged by 25 percent last month from year-ago levels. One in every 452 housing units in the nation was the subject of a foreclosure filing, the company reported.

In addition to Citigroup, Fannie Mae and Freddie Mac and for two other failed thrifts taken over by the government last week are adopting the FDIC-IndyMac approach for easing homeowners' monthly mortgage payments.

FDIC Chairman Sheila Bair is also pushing a more ambitious, nationwide plan for foreclosure relief. That plan includes $24 billion in government loan guarantees to insure lenders against borrowers who still default on the renegotiated mortgages despite the lower payments.

Citigroup has instituted its own foreclosure mitigation plan in addition to the one it signed with the government on Sunday.

Two weeks ago, the bank launched a six-month program for reaching out to 500,000 homeowners who have yet to fall behind on their mortgage payments but might need their payments reworked to remain current. The company said the effort will result in workouts of approximately $20 billion in underlying mortgage balances.

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