Behind on your mortgage? The federal government might fast track a way to reduce your monthly house payment.

If you’re current on your mortgage, and didn’t borrow more than you could repay, the federal government thanks you for your responsibility. That and four bucks will buy you a cappuccino.

Under the express modification program, Fannie Mae, Freddie Mac and some lenders will offer to reduce mortgage payments for some homeowners who have fallen at least three months behind. The plan is supposed to go into effect by Dec. 15.

“This program creates a fast-track method of getting troubled borrowers into an affordable mortgage payment,” said James Lockhart, head of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.

The new plan, announced Tuesday, Nov. 11, is intended to catch hundreds of thousands of delinquent borrowers in its net and modify their loans en masse, according to a set of rules. That differs from the current mortgage-modification regime, under which each delinquent borrower is reeled in individually and processed separately, using a combination of rules and subjective judgments.

Who doesn’t qualify

Not everyone will qualify for what officials call “streamlined” modifications. The program applies to home loans that are owned by Fannie Mae and Freddie Mac. Those two companies own or guarantee 58 percent of single-family mortgages, and about 20 percent of the mortgages that are delinquent, Lockhart said.

Lockhart urged the owners of the other 80 percent of delinquent mortgages — the ones that are not held or guaranteed by Fannie or Freddie — to adopt the federal government’s guidelines.

The plan leaves out responsible borrowers who have never fallen behind on their mortgage payments. Jeff Lazerson, president of Mortgage Grader, an online brokerage, said this approach will alienate those responsible borrowers. He thinks everyone should be eligible for a modification.

“They have to go through Fannie and Freddie and tap the Treasury money and guarantee rates at a very low level, both for the mainstream borrower that’s not in trouble as well as the borrowers that need loan modifications,” Lazerson says. He recommends a rate “in the low 5 percent range, to get everyone’s attention. That’s going to motivate people to do this.”

Victoria Clement, an executive with Grander Financial in Irvine, Calif., called the plan “definitely a step in the right direction.” She said the modification plan could help a broad slice of homeowners.

“We find that there are a lot of homeowners on the verge of delinquency,” she said. “They are about to lose their job. They have an adjustable-rate mortgage that’s going to reset — there are millions of those people in that category from all the option ARMs and the short-term interest rates they were given. That’s going to come to fruition very soon.”

Who qualifies

Only owner-occupied residences will be eligible for the fast-track loan modifications. Modifications will be offered to homeowners who are at least three months behind on their payments, are not in bankruptcy, and document their incomes to show that they truly are in need of lower payments. Lockhart said modified mortgage payments will be limited to a maximum of 38 percent of the household’s before-tax income. That includes condo and homeowner association fees, as well as principal, interest, taxes and insurance.

“If the servicer is unable to create an affordable payment with this streamlined program, it will further evaluate the borrower’s situation with a customized approach,” Lockhart said.

Payments will be reduced in three steps, said Brian Montgomery, the federal housing commissioner:

  • Terms will be extended. For example, a 30-year mortgage might be converted into a 40-year loan.
  • If extending the term isn’t enough to meet the 38 percent threshold, the interest rate will be reduced. For example, a 6.5 percent loan could be reduced to 3 percent.
  • Finally, if those two steps don’t get the payments down enough, part of the principal will be deferred, “with the balance added to the back of the loan,” Montgomery said.

Take the example of someone who has a $300,000 loan, but can’t afford payments on a loan of more than $250,000. The borrower could pay principal and interest on $250,000, even if the total amount owed remains $300,000. The “deferred” $50,000 would be paid back to the lender when the home is sold or the mortgage is refinanced.

“By reducing documentation requirements, and simplifying the analysis, potentially hundreds of thousands of delinquent borrowers with conventional and subprime loans, who can afford a payment that’s equal to 38 percent of their gross monthly income, will receive modification offers in the mail,” Montgomery said.

FDIC modification plan

This mass-modification plan is similar, but not identical, to the one that the Federal Deposit Insurance Corp. pioneered over the summer, after the FDIC took over the failed Indymac Bank. Under FDIC chairman Sheila Bair’s direction, delinquent Indymac borrowers are getting longer terms and lower interest rates.

Bair’s plan differs in one important respect: If a longer term and lower rate don’t cut the payment down to the 38 percent threshold, the FDIC forgives a portion of the homeowner’s debt instead of deferring it. Debt forgiveness is offered only on Indymac mortgages that the FDIC owns.

By championing debt deferral instead of debt forgiveness in the broader program announced Tuesday, the federal government hopes to get a lot of mortgage servicers to sign on.

At the Mortgage Bankers Association’s annual convention last month, experts encouraged the government to try the mass-modification approach.

“We need some means of putting a very systematic, streamlined and widespread process of loan modification,” said Ellen Schloemer of the Center for Responsible Lending. “The origination process for all these years was sort of like a fire hose of shooting loans from origination to the securities and to investors — and now we’re talking about doing loan modifications with an eye dropper. It’s never going to work that well. It’s not going to solve the problems of the excesses of the mortgage crisis.”