For the first time, there appears to be a concerted effort among major lenders to help struggling homeowners avoid foreclosure by altering the terms of their loans.
The action supplements a federal plan to streamline loans held by Fannie Mae and Freddie Mac.
The private lenders' "workout" agreements are seen by many housing industry analysts as a key step in containing the foreclosure avalanche and bringing stability back to the housing market.
Citigroup has announced it is placing a moratorium on foreclosures so that it can spend the time needed to analyze situations on a case-by-case basis. If the homeowner meets certain criteria, the bank says, it may offer new terms.
For example, if the home in question is a principal residence and not an investment property, the bank will consider a workout arrangement.
In addition, the borrower will have to work with the bank in good faith and have enough steady income to make reduced payments. If those conditions are met, the interest rate might be changed to as low as one percent for up to two years.
In some cases, homeowners could have the principal of the loan reduced and the term of the loan increased, in order to make the payments more affordable.
Bank of America, which now owns Countrywide Financial, JPMorgan Chase and others have also announced plans to move more aggressively to help homeowners avoid foreclosure.
Why has it taken this long for banks to react? After all, the foreclosure crises began picking up speed more than a year ago.
At the time many lenders said they couldn't unilaterally change the terms of the loans, since most mortgages have been split up and sold as securities, and therefore had many different "owners."
While no explanation has been offered, it's worth noting that lenders' new accommodation follows the government's injection of up to $700 billion of taxpayer money into the banking system. While there's no way to determine whether the banks are using tax dollars to rewrite these loans, many analysts say the money probably makes banks more likely than before to show some flexibility.
The Mortgage Bankers Association reports more than four million hoeowners were at least one payment behind on their mortgage at the end of June 2008, with at least a half million homes in some state of foreclosure.
Fed plan
Meanwhile, the U.S. government is offering a plan to streamline the workout process for millions of homeowners whose mortgages are held by Fannie Mae and Freddie Mac.
Details of the plan that leaked prior to today's announcement revealed the new approach will give lenders more flexibility in modifying loans held by the two mortgage giants, both of which recently received a $100 billion infusion of tax dollars.
Fannie Mae and Freddie Mac currently own or guarantee nearly half of U.S. mortgages.
