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Mortgage-modification pace lagging New US program to help home buyers Gov't home loan agency faces cash squeeze1 year after takeover, Fannie, Freddie still shakyMortgage delinquencies hit record high in Q2A little good news on housingUS home construction falls 1 percent, misses viewsUS list names laggards in mortgage-aid programHousing plan offered help to 15 pct of borrowers New-home sales show signs of life

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The government and the mortgage industry are launching 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 program goes into effect Dec. 15.

The Federal Housing Finance Agency, which seized control of the two mortgage finance companies in September, announced the plan Tuesday along with other government and industry officials, including Hope Now, an alliance of mortgage companies organized by the Bush administration last year.

"Foreclosures hurt families, their neighbors, whole communities and the overall housing market," said James Lockhart, the housing finance agency's director. "We need to stop this downward spiral."

The plan could have tremendous importance because Fannie Mae and Freddie Mac own or guarantee nearly 31 million U.S. mortgages, or nearly six of every 10 outstanding.

Although the two are the dominant players in the U.S. mortgage market, they represent only 20 percent of delinquent loans.

Officials hope the new approach will become a model for loan servicing companies, which collect mortgage payments and distribute them to investors. These companies have been roundly criticized for being slow to respond to a surge in defaults.

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. Investors who do not occupy their homes would be excluded, as would borrowers who have filed for bankruptcy.

Borrowers would get help in several ways: The interest rate would be reduced so that borrowers would not pay more than 38 percent of their income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free.

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.

And critics were quick to pour water on the latest plan.

"Instead of a massive foreclosure prevention program, we wait for a homeowner to be in a failing position before doing anything, which often is too late," said John Taylor, president and CEO of the National Community Reinvestment Coalition.

"It's been the foreclosures that have been driving the economic downturn and we've been saying that for 13 months now. To stop the bleeding is to end foreclosures," he continued. "But now that so many other sectors in the economy have fallen, I'm not sure if we're past the point of no return."

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 for borrowers is that the vast majority of troubled loans were packaged into complicated investments that have proved 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. And it appears the majority of those loans will not be helped by the new plan.

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

Nevertheless, Tuesday's 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 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.

Arizona is targeted

Citi is targeting homeowners in geographic areas with higher-than-average unemployment and foreclosure rates, primarily in Arizona, California, Florida, Michigan, Ohio and Indiana.

Federal Deposit Insurance Corp. Chairman Sheila Bair said the plan is insufficient to bring widespread changes in home loans to stem the tide of foreclosures.

Bair, a Bush appointee and independent regulator, has been saying for months that the government needs to do more to help tens of thousands of home borrowers avert foreclosure, including setting standards for modifying mortgages into more affordable loans, and providing loan guarantees to banks that meet them.

Democrats on Capitol Hill aren't satisfied, either. "When the loan is chopped up into a million pieces and any investor can block a modification from happening, a program like this will only scratch the surface of the mortgage crisis," said Sen. Charles Schumer, D-N.Y.