Gov't to announce new loan aid effort

The government and the mortgage industry are set to announce the most sweeping effort yet to help troubled homeowners by speeding up the process for renegotiating hundreds of thousands of delinquent loans held by Fannie Mae and Freddie Mac.


The Federal Housing Finance Agency, which seized control of the two mortgage finance companies in September, scheduled a press conference for 2 p.m. EST. Scheduled to attend were officials from the Treasury Department, Wells Fargo & Co., the Department of Housing and Urban Development and Hope Now, an alliance of mortgage companies organized by the Bush administration last year.

An industry official who worked on the plan said the new approach will allow lenders to modify more delinquent loans by establishing broad criteria to speed up the process. The official spoke on condition of anonymity because details had not been announced.

The new initiative will likely have tremendous importance because Fannie Mae and Freddie Mac own or guarantee about half of U.S. home loans.

To qualify, borrowers would have to be at least three months behind on their home loans, and would need to owe 90 percent or more than the home is currently worth. The interest rate would be reduced so that borrowers would not pay more than 38 percent of their income on housing expenses, the industry official said. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount owed to be deferred.

While lenders have beefed up their efforts to aid borrowers over the past year, their earlier efforts have not kept up with the worst housing recession in decades.

More than 4 million American homeowners, or 9 percent of borrowers with a mortgage were either behind on their payments or in foreclosure at the end of June, according to the most recent data from the Mortgage Bankers Association.

One reason the problem has been so tough to solve is that the vast majority of troubled loans were packaged into complicated investments that have proven extremely difficult to unwind.

Deutsche Bank estimates more than 80 percent of the $1.8 trillion in outstanding troubled loans have been packaged and sold in slices to investors around the world.

The remaining 20 percent are "whole loans," which are easier to modify because they have only one owner.

Nevertheless, Tuesday's expected announcement coupled with recent and more aggressive strategies from the major retail banks are important steps to fix the housing crisis. After more than a year of slow and weak initiatives, there appears to be a concerted and serious effort to get at the heart of the credit crisis: falling U.S. home prices and record foreclosures.

Citigroup announced late Monday it is halting foreclosures for borrowers who live in their own homes, have decent incomes and stand a good chance of making lowered mortgage payments. The New York-based banking giant also said it is also working to expand the program to include mortgages for which the bank collects payments but does not own.

Additionally, over the next six months, Citi plans to reach out to 500,000 homeowners who are not currently behind on their mortgage payments, but who are on the verge of falling behind. This represents about one-third of all the mortgages that Citigroup owns, the bank said.

Citi plans to devote a team of 600 salespeople to assist the targeted borrowers by adjusting their rates, reducing principal or increasing the term of the loan.

Late last month, JPMorgan Chase & Co expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 customers. The New York-based bank has already modified about $40 billion in mortgages, helping 250,000 customers since early 2007.

Bank of America, meanwhile, has said that starting Dec. 1, it will modify an estimated 400,000 loans held by newly acquired Countrywide Financial Corp. as part of an $8.4 billion legal settlement reached with 11 states in early October.

Treasury set to dish out financial rescue funds

The Treasury Department will start doling out $125 billion to nine major banks this week to get credit flowing again, giving a lift to U.S. markets on rising confidence that the government's moves would stave off a protracted recession.

Investors overseas were less assured, though. Stocks fell sharply around the globe.

Assistant Treasury Secretary David Nason said the deals with the nine banks were signed Sunday, and the government will make the stock purchases this week. The deals are designed to bolster the banks' balance sheets so they will begin more normal lending.

The action will mark the first deployment of resources from the government's $700 billion financial rescue package passed by Congress on Oct. 3.

The bailout package has undergone a major change in emphasis since it was passed by Congress. Treasury Secretary Henry Paulson decided to use $250 billion of the $700 billion to make direct purchases of bank stock, partially nationalizing the country's banking system, as a way to get money into the financial system more quickly.

The plan is also aimed at clearing banks' balance sheets of bad assets. That effort has yet to begin although the administration expects to use $100 billion to purchase bad assets in coming months.

The deployment of the first $125 billion to the major banks had been delayed while the government and the banks worked out the details for the purchases. Nason, a key architect of the rescue plan, said in an interview Monday on CNBC that those agreements had been signed late Sunday night.

Treasury is also starting to give approval to major regional banks with the goal of getting another $125 billion in stock purchases made by the end of this year.

KeyCorp, said Monday it would issue stock for a $2.5 billion infusion of capital from the government. SunTrust Banks Inc. also said it has received preliminary approval from Treasury for a $3.5 billion investment. In all, about 15 regional banks have received preliminary approvals for the government to make stock purchases.

Treasury said it was allowing each bank to announce its own deal once preliminary agreements were reached. Treasury will announce the final deals on its Web site each day once all the paperwork is completed and signed. By law, Treasury must announce the agreements within 48 hours after they are signed.

Treasury has given the go-ahead for stronger banks to use the money it receives in the rescue program to acquire weaker banks. That has prompted criticism the government should not be financing the consolidation of the banking system — in effect helping to choose winners and losers.

As fears mounted of a prolonged and deep worldwide recession, a juggernaut of selling swept across world markets Monday, stripping billions of dollars of wealth from people across the globe.

Major stock markets in Hong Kong, Tokyo, Britain, France and Germany slid, dragging down smaller bourses in emerging markets such as South Korea and the Phillipines. Tokyo's Nikkei 225 index closed at its lowest since October 1982.

But stocks rebounded on Wall Street. The Dow Jones industrial average started the day down nearly 90 points in the first few minutes of trading, but then stabilized, bolstered in part by a better-than-expected reading on new home sales and the Treasury announcement that the stock purchase program will begin this week. In early afternoon trading, the Dow Jones industrial average was up 125 points.

The Federal Reserve will begin a two-day meeting Tuesday and many economists expect it to cut interest rates — perhaps to their lowest point in more than four years — with the hope of relieving some of the economic pain felt by many Americans.

The Fed also began a major new initiative Monday to unclog frozen credit markets by purchasing commercial paper, the short-term loans that businesses use to fund their daily operations.

The market for commercial paper dried up after the bankruptcy of Lehman Brothers Holdings Inc. last month and other troubles in the global banking system. The biggest buyers of commercial paper are money market funds, some of which took big hits when Lehman collapsed.

The convergence of a housing collapse and a lockup in bank lending has created the worst financial crisis in more than a half-century.

With a recession seen as inevitable in the U.S., if not already under way, any Fed rate cut would be aimed at cushioning the fallout in the world's largest economy.

Vanishing jobs and shrinking paychecks have forced U.S. consumers to cut back sharply. Millions of ordinary Americans have watched their 401(k)s and other nest eggs shrink and the value of their homes drop, making them feel in even worse financial shape. In turn, businesses have cut back on hiring and other investments as customers hunker down and credit problems make it harder and more costly to get financing.

Not even China's mighty economy was immune to the rising recession anxiety. Its benchmark index slumped to its lowest level in more than two years as investors reacted to dismal earnings reports.

Currency markets were unnerved by a statement from seven leading industrial nations Sunday warning of the "recent excessive volatility" in the value of the Japanese currency, which is rising against the U.S. dollar toward the 90 yen level and near 13-year highs.

Dealers had one wary eye on central banks, watching whether they would intervene in currency markets to sell yen and prop up other currencies. The yen's rise threatens Japan's export-heavy economy by making its goods relatively more expensive.

Shares of top Japanese exporters Toyota Motor Corp. and Sony Corp. were hit hard Monday. The losses came despite a report that the government was considering a massive capital injection into struggling banks in a bid to calm jittery financial markets.

Investors fled to the safety of some types of government debt Monday. The price of gold — another traditional safe have in times of panic — rose.

Investors around the world seemed largely unimpressed by government efforts to help lift market sentiment. South Korea's central bank cut its key interest rate Monday by three-quarters of a percentage point, its largest-ever reduction. The country's stock market benchmark Kospi ended with a 0.8 percent gain.

Elsewhere, central banks in Australia and Hong Kong added funds to their markets to boost liquidity.