Big Banks Halting Foreclosures and Modifying Mortgages

Chair of the FDIC continues to lobby her counterpart at the Treasury, Hank Paulson and the White House to implement loan modifications as a primary strategy in the mortgage market rescue. However, this bureaucratic battle may be irrelevant--the mega-banks are already rolling out the plan.

Citigroup becomes the latest to announce a foreclosure moratorium and extensive loan modification program. In a recent statement Citigroup says it is halting most foreclosures as it attempts to modify about $20 billion in mortgages.

Citigroup's plan involves reaching 500,000 homeowners in the next six months, targeting borrowers that are at risk of falling behind in their mortgages. Citigroups says it will not only try to help homeowners with mortgages that Citigroup directly owns, but also mortgagees that it services on behalf of other lenders.

The Citigroup announcement follows similar programs launched by its rivals. JP Morgan Chase began its loan modification program in late October, attempting to prevent foreclosure on loans as it works out $110 billion in troubled mortgage assets. Meanwhile, Bank of America says it has already modified 226,000 loans this year, include many from its Countrywide acquisition.

These loan modification actions can't come fast enough. A total of 765,558 homeowners received a default or other foreclosure action notice in the third quarter of this year.

Each of these large banks seem to be using similar strategy to maximize the effectiveness of their loan modifications--targeting borrowers that live in their homes and have sufficient current income to pay more affordable mortgage payments.

JP Morgan's loan modification program will assist 400,000 homeowners with $70 billion in mortgage work-outs over the next two years. This is in addition to the 250,000 borrowers and $40 billion in mortgages that have already been refinanced under the existing loan modification programs. These programs include mortgages in the recently acquired Washington Mutual, EMC, and Bear Stearns.

Bank of America has launched two similar programs to reduce $11 billion in mortgage payments, to include Counterywide--covering more than $120 billion in outstanding balances.

FDIC Chairman Sheila Bair continues to strongly advocate a plan to guarantee these types of mortgage modifications, helping to stop foreclosures. The significance of this plan is the impact it will have on stemming the continued flood of bank sales on the housing marketing--pushing down housing prices. Bair's plan would include using $50 billion of the $700 billion Troubled Assist Relief Program (TARP) already approved by Congress and the President.

It looks like loan modifications are becoming the consensus mortgage meltdown rescue plan, with or without the government endorsement.