Sources: Gov't prepares loan modification plan

The government is considering a plan that would help around 3 million homeowners avoid foreclosure, sources briefed on the matter said.

A final deal had not been reached as of Wednesday afternoon and negotiations could still fall apart, but government agencies were contemplating using around $50 billion from the recently passed bailout of the financial industry to guarantee about $500 billion in mortgages.

The plan could include loan modifications that would lower interest rates for a five-year period, according to two people briefed on the plan, who asked not to be identified because details were still being worked out and the plan was not yet public.

The plan would be the most aggressive effort yet to limit damages from the U.S. housing recession, which has shaken global credit markets.

More than 4 million American homeowners with a mortgage were at least one payment behind on their loans at the end of June, and 500,000 had started the foreclosure process, according to the most recent data from the Mortgage Bankers Association.

The government's program would be run by the Federal Deposit Insurance Corp. The agency's chairman, Sheila Bair, said last week she was working "closely and creatively" with the Treasury Department on such a plan, but revealed few details.

Andrew Gray, an FDIC spokesman, said it would be "premature to speculate about any final framework or parameters of a potential program."

Treasury Department spokeswoman Jennifer Zuccarelli called details of the loan modification plan "simply inaccurate." She said the Bush administration "is looking at ways to reduce foreclosures, and that process is ongoing," but has not decided on a final approach.

Borrower frustration is growing over the government's existing assistance programs, which critics say have been too slow and small in scope to have much impact on soaring foreclosures.

On Wednesday, about 100 demonstrators marched in front of the headquarters of Fannie Mae, and forced a mid-afternoon meeting with the company's chief executive, Herbert Allison.

Some held signs that read "Restructure our loans now," "Fannie Mae destroys lives" and "Foreclose on Fannie Mae."

Bruce Marks, chief executive of the Boston-based Neighborhood Assistance Corp. of America, called on Fannie Mae to adopt a program similar to the one the FDIC put in place at failed IndyMac Bank of Pasadena, Calif. Borrowers there are getting interest rates of about 3 percent for five years.

After the meeting, which included Allison and other top managers, company spokeswoman Amy Bonitatibus said "we agreed to continue to meet with them and work together on foreclosure prevention." Allison and other top executives

Over the past 10 weeks, Fannie Mae says it has received more than 40,000 defaulting loans and stopped 80 percent of them from going into foreclosure.

After meeting with Allison, Marks said the chief executive "understands the issue of making these mortgages affordable over the long term."

Last month, the government seized control Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, with a rescue plan that could require the Treasury Department to inject as much as $100 billion into each to keep them afloat.

It was unclear Wednesday what role Fannie and Freddie would play in the government's sweeping plan to help millions of American homeowners. But lawmakers on Capitol Hill want the companies to take a more aggressive approach.

Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee said in a statement that "federal agencies and financial institutions must do more to modify the mortgages they hold in order to stop foreclosures and help families keep their homes."

By guaranteeing millions of mortgages, the government could help restore confidence in the market for securities backed by mortgage loans. That was where the global credit crisis started, leading to this month's dramatic stock market plunge.

As a surprising number of homeowners began defaulting on their loans, investors could no longer put a value on the securities which were backed by pools of mortgages. So trading of these securities froze, sending shock waves through the financial industry.