Fannie Mae and Freddie Mac, in conservatorship, jointly announced a new program to help homeowners threatened with foreclosure. The Streamlined Modification Plan (SMP) is endorsed by the Federal Housing Finance Agency, which regulates Fannie and Freddie, and will be administered in conjunction with HOPE NOW, the coalition of mortgage industry participants that was created to coordinate private-sector mortgage relief efforts.

The SMP will be open to borrowers with conforming mortgages that are guaranteed by Fannie or Freddie and whose mortgage payments are at least 90 days overdue. Eligible borrowers will get the opportunity to modify their mortgages, typically by reducing the interest rate, so that monthly payments do not exceed 38 percent of the borrower’s income. Loan terms and principle might also be altered in appropriate cases. The loans would be re-amortized over 40 years.

Treasury Interim Assistant Secretary for Financial Stability Neel Kashkari praised the initiative. “The adoption of this streamlined modification framework is an additional tool that servicers will now have to help avoid preventable foreclosures,” he said. This framework will not only help those homeowners who receive a streamlined modification, it will also further address servicer capacity concerns by freeing up resources, helping ensure that borrowers do not fall through the cracks because servicers aren’t able to get to them.

Despite Kashkari’s enthusiasm, SMP quickly encountered critics. The program addresses only conforming mortgages guaranteed by Fannie and Freddie, where the foreclosure rate is currently 1.72 percent. The foreclosure rate on adjustable-rate subprime mortgages, which the new program does not address, is closer to 20 percent.

Critics Abound

“These voluntary plans sound nice, but they don’t do the job,” said Senator Charles Schumer (D-N.Y.), Chairman of the congressional Joint Economic Committee. “A program like this will only scratch the surface of the mortgage crisis.” Senate Banking Committee Chairman Christopher Dodd (D-Conn.) warned, “This should not be considered a replacement for the guarantee program authorized by the recently enacted financial rescue law.”

FDIC Chairman Sheila Bair, conspicuously absent when the plan was announced, issued a sharply critical statement. The plan “falls short of what is needed to achieve wide-scale modifications of distressed mortgages,” she said. “As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans.”

Bair’s criticism was somewhat ironic, as the new program was loosely modeled on her agency’s program to aid borrowers at IndyMac, a failed bank now under FDIC control.