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The foreclosure rate in the United States has been rising rapidly since the middle of 2006. Losing
a home to foreclosure can hurt homeowners in many ways; for example, homeowners who have
been through a foreclosure may have difficulty finding a new place to live or obtaining a loan in
the future. Furthermore, concentrated foreclosures can drag down nearby home prices, and large
numbers of abandoned properties can negatively affect communities. Finally, the increase in
foreclosures may destabilize the housing market, which could in turn negatively impact the
economy as a whole.
Because of the many negative consequences associated with rising foreclosure rates, there is a
broad consensus that the government should explore efforts to prevent further increases in
foreclosures and help more families preserve homeownership. Several federal, state, and local
foreclosure prevention initiatives have been launched to date. These programs include the expired
FHASecure program and the Hope for Homeowners program, both of which allowed troubled
borrowers to refinance their loans into new mortgages backed by the Federal Housing
Administration (FHA); a loan modification program set up by Fannie Mae and Freddie Mac for
mortgages held by those institutions; and a program put in place by the Federal Deposit Insurance
Corporation (FDIC) to help troubled borrowers with loans that had been owned by IndyMac Bank
before it was taken over by the FDIC. Several states and localities have initiated their own
foreclosure prevention efforts, as have private companies including Bank of America, JP Morgan
Chase, and Citigroup. A voluntary alliance of mortgage lenders, servicers, investors, and housing
counselors has also formed the HOPE NOW Alliance to reach out to troubled borrowers.
Some observers have questioned how effective the recent government and private foreclosure
prevention programs have been at helping homeowners remain in their homes. Some have called
for the existing programs to be revised or expanded, while others have suggested that additional
foreclosure prevention efforts are needed. Proposals for additional foreclosure prevention efforts
include amending bankruptcy law to allow judges to modify the terms of mortgages on primary
residences; imposing a temporary moratorium on foreclosures; and using funding from the
Troubled Asset Relief Program (TARP) authorized by the Emergency Economic Stabilization Act
of 2008 (P.L. 110-343) to implement a broader foreclosure prevention plan.
While many observers agree that more needs to be done to prevent foreclosures, there are several
challenges associated with foreclosure mitigation plans. These challenges include implementation
issues, such as deciding who has the authority to make mortgage modifications, developing the
capacity to complete widespread modifications, and assessing the possibility that homeowners
with modified loans will nevertheless default again in the future. Other challenges are related to
the perception of fairness, the problem of inadvertently providing incentives for borrowers to
default, and the possibility of setting an unwanted precedent for future mortgage lending.
This report describes the consequences of foreclosure on homeowners, outlines recent foreclosure
prevention plans implemented by the government and private organizations, and discusses the
challenges associated with foreclosure prevention. It will be updated as events warrant.

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Introduction and Background .......................................................................................................... 1
Recent Market Trends ............................................................................................................... 1
Impacts of Foreclosure.............................................................................................................. 3
The Policy Problem................................................................................................................... 3
Why Might a Household Find Itself Facing Foreclosure? ........................................................ 4
Changes in Household Circumstances................................................................................ 4
Mortgage Features .............................................................................................................. 5
Types of Loan Workouts ........................................................................................................... 7
Repayment Plans................................................................................................................. 8
Principal Forbearance ......................................................................................................... 8
Principal Write-Downs/Principal Forgiveness.................................................................... 8
Interest Rate Reductions ..................................................................................................... 8
Extended Loan Term/Extended Amortization..................................................................... 9
Recent Foreclosure Prevention Initiatives....................................................................................... 9
Government Initiatives.............................................................................................................. 9
FHASecure .......................................................................................................................... 9
IndyMac Loan Modifications ............................................................................................11
Hope for Homeowners...................................................................................................... 12
Fannie Mae and Freddie Mac ........................................................................................... 13
Federal Reserve................................................................................................................. 14
Foreclosure Counseling Funding to NeighborWorks America ......................................... 14
State and Local Initiatives................................................................................................. 15
Private Initiatives .................................................................................................................... 15
HOPE NOW Alliance ....................................................................................................... 15
Bank of America ............................................................................................................... 16
JP Morgan Chase .............................................................................................................. 17
Citigroup ........................................................................................................................... 17
Other Foreclosure Prevention Proposals ....................................................................................... 18
Changing Bankruptcy Law ..................................................................................................... 18
Foreclosure Moratorium.......................................................................................................... 18
Federal Deposit Insurance Corporation Plan .......................................................................... 19
Use of TARP Funds................................................................................................................. 19
Issues and Challenges Associated with Preventing Foreclosures.................................................. 19
Who Has The Authority to Modify Mortgages? ..................................................................... 19
Volume of Delinquencies and Foreclosures ............................................................................ 20
Possibility of Re-Default......................................................................................................... 20
Fairness Issues......................................................................................................................... 21
Incentives ................................................................................................................................ 21
Precedent ................................................................................................................................. 21

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Figure 1. Percentage of Loans in Foreclosure by Type of Loan...................................................... 2

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Table A-1. Features of Selected Programs..................................................................................... 22

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Appendix. Comparison of Recent Federal Foreclosure Prevention Initiatives ............................. 22

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Author Contact Information .......................................................................................................... 24

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The foreclosure rate in the United States has been rising rapidly since around the middle of 2006.
The large increase in home foreclosures since that time has negatively impacted individual
households, local communities, and the economy as a whole. Consequently, an issue before
Congress is whether to use federal resources and authority to help prevent further increases in
home foreclosures and, if so, how to best accomplish this objective. This report details the impact
of foreclosure on homeowners. It also describes recent attempts to preserve homeownership that
have been implemented by the government and private lenders, and briefly outlines current
proposals for further foreclosure prevention activities. It concludes with a discussion of some of
the challenges inherent in designing foreclosure prevention initiatives. This report will be updated
as events warrant.
Foreclosure refers to formal legal proceedings initiated by a mortgage lender against a
homeowner after the homeowner has missed a certain number of payments on his or her
mortgage.1 When a foreclosure is completed, the homeowner loses his or her home, which is
either repossessed by the lender or sold at auction to repay the outstanding debt. In general, the
term “foreclosure” can refer to the foreclosure process or the completion of a foreclosure. This
report deals primarily with preventing foreclosure completions.
In order for the foreclosure process to begin, two things must happen: a homeowner must fail to
make a certain number of payments on his or her mortgage, and a lender must decide to initiate
foreclosure proceedings rather than pursue other options (such as offering a repayment plan or a
loan modification). A borrower that misses one or more payments is usually referred to as being
delinquent on a loan; when a borrower has missed three or more payments, he or she is generally
considered to be in default. Lenders can choose to begin foreclosure proceedings after a
homeowner defaults on his or her mortgage, although lenders vary in how quickly they begin
foreclosure proceedings after a borrower goes into default. Furthermore, the rules governing
foreclosures, and the length of time the process takes, vary by state.
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Home prices rose rapidly throughout some regions of the United States beginning in 2001.
Housing has traditionally been seen as a safe investment that can offer an opportunity for high
returns, and rapidly rising home prices reinforced this view. During this housing “boom,” many
people decided to buy homes or take out second mortgages in order to access their increasing
home equity. Furthermore, rising home prices and low interest rates contributed to a sharp
increase in people refinancing their mortgages; for example, between 2000 and 2003, the number
of refinanced mortgage loans jumped from 2.5 million to over 15 million.2 Around the same time,
subprime lending, which generally refers to making mortgage loans to individuals with credit

1 For a more detailed discussion of the foreclosure process and the factors that contribute to a lender’s decision to
pursue foreclosure, see CRS Report RL34232, The Process, Data, and Costs of Mortgage Foreclosure, by Darryl E.
Getter et al.
2 U.S. Department of Housing and Urban Development, Office of Policy Development and Research, An Analysis of
Mortgage Refinancing, 2001-2003, November 2004, p.1, http://www.huduser.org/Publications/pdf/
MortgageRefinance03.pdf.
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scores that are too low to qualify for prime rate mortgages, also began to increase, reaching a
peak between 2004 and 2006. However, beginning in 2006 and 2007, home sales started to
decline, home prices stopped rising and began to fall in many regions, and the rates of
homeowners becoming delinquent on their mortgages or going into foreclosure began to increase.
The percentage of home loans in the foreclosure process in the U.S. has been rising rapidly since
the middle of 2006. Although not all homes in the foreclosure process will end in a foreclosure
completion, an increase in the number of loans in the foreclosure process is generally
accompanied by an increase in the number of homes on which a foreclosure is completed.
According to the Mortgage Bankers Association, an industry group, about 1% of all home loans
were in the foreclosure process in the second quarter of 2006. By the third quarter of 2008, the
rate had tripled to almost 3%.
The foreclosure rate for subprime loans has always been higher than the foreclosure rate for
prime loans. For example, in the second quarter of 2006, just over 3.5% of subprime loans were
in the foreclosure process compared to less than 0.5% of prime loans. However, both prime and
subprime loans have seen similar increases in the foreclosure rate over the past several quarters.
Like the foreclosure rate for all loans combined, the foreclosure rates for prime and subprime
loans have both more than tripled, with the rate of subprime loans in the foreclosure process
increasing to about 12.5% in Q3 2008 and the rate of prime loans in the foreclosure process
increasing to just over 1.5% in the same period. According to the Congressional Budget Office
(CBO), observers expect the high rate of foreclosures to continue in 2009 and beyond.3 Figure 1
illustrates the trend in the rate of mortgages in the foreclosure process during the past several
years.
Figure 1. Percentage of Loans in Foreclosure by Type of Loan
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Source: Figure created by CRS using data from the Mortgage Bankers Association.

3 Statement of Douglas W. Elmendorf, Director, Congressional Budget Office, testimony before the U.S. Congress,
Senate Committee on the Budget, Federal Response to the Housing and Financial Crisis, 111th Cong., 1st sess., January
28, 2009, p. 17, http://cbo.gov/ftpdocs/99xx/doc9971/01-28-FinancialMarkets_Testimony.pdf.
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Notes: The Mortgage Bankers Association (MBA) is one of several organizations that reports delinquency and
foreclosure data, but it does not represent all mortgages. MBA estimates that its data cover about 80% of the
mortgage market.
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Losing a home to foreclosure can have a number of negative effects on a household. For many
families, losing a home means losing the household’s largest store of wealth. Furthermore,
foreclosure can negatively impact a borrower’s creditworthiness, making it more difficult for him
or her to buy a home in the future. Finally, losing a home to foreclosure can also mean that a
household loses many of the less tangible benefits of owning a home. Research has shown that
these benefits include increased civic engagement that results from having a stake in the
community, and better health, school, and behavioral outcomes for children.4
Some homeowners might have difficulty finding a place to live after losing their home to
foreclosure. Many will become renters. However, some landlords may be unwilling to rent to
families whose credit has been damaged by a foreclosure, limiting the options open to these
families. There can also be spillover effects from foreclosure on current renters. Renters living in
units facing foreclosure may be required to move, even if they are current on their rent payments.
As more homeowners become renters and as more current renters are displaced when their
landlords face foreclosure, pressure on local rental markets may increase, and more families may
have difficulty finding affordable rental housing. Some observers have also raised the concern
that a large increase in foreclosures could increase homelessness, either because families who lost
their homes have trouble finding new places to live or because the increased demand for rental
housing makes it more difficult for families to find adequate, affordable units.
If foreclosures are concentrated, they can also have negative impacts on communities. Many
foreclosures in a single neighborhood may depress surrounding home values.5 If foreclosed
homes stand vacant for long periods of time, they can attract crime and blight, especially if they
are not well maintained. Concentrated foreclosures also place pressure on local governments,
which can lose property tax revenue and may have to step in to maintain vacant foreclosed
properties.
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There is a broad bipartisan consensus that the recent rapid rise in foreclosures is having negative
consequences on households and communities. For example, Representative Spencer Bachus,
Ranking Member of the House Committee on Financial Services, has said that “[i]t is in
everyone’s best interest as a general rule to prevent foreclosures. Foreclosures have a negative

4 For example, see Donald R. Haurin, Toby L. Parcel, and R. Jean Haurin, The Impact of Homeownership on Child
Outcomes, Joint Center for Housing Studies, Harvard University, Low-Income Homeownership Working Paper Series,
October 2001, http://www.jchs.harvard.edu/publications/homeownership/liho01-14.pdf, and Denise DiPasquale and
Edward L. Glaeser, Incentives and Social Capital: Are Homeowners Better Citizens?, National Bureau of Economic
Research, NBER Working Paper 6363, Cambridge, MA, January 1998, http://www.nber.org/papers/w6363.pdf?
new_window=1.
5 For a review of the literature on the impact of foreclosures on nearby house prices, see Kai-yan Lee, Foreclosure's
Price-Depressing Spillover Effects on Local Properties: A Literature Review, Federal Reserve Bank of Boston,
Community Affairs Discussion Paper, No. 2008-01, September 2008, http://www.bos.frb.org/commdev/pcadp/2008/
pcadp0801.pdf.
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impact not only on families but also on their neighbors, their property value, and on the
community and local government.”6 Senator Chris Dodd, Chairman of the Senate Committee on
Banking, Housing, and Urban Affairs, has described an “overwhelming tide of foreclosures
ravaging our neighborhoods and forcing thousands of American families from their homes.”7
There is less agreement among policymakers about how much the federal government should do
to prevent foreclosures. Proponents of enacting government policies and using government
resources to prevent foreclosures argue that, in addition to being a compassionate response to the
plight of individual homeowners, such action may prevent further damage to home values and
communities that can be caused by concentrated foreclosures. Supporters also suggest that
preventing foreclosures may help stabilize the economy as a whole. Opponents of government
foreclosure prevention programs argue that foreclosure prevention should be worked out between
lenders and borrowers without government interference. Opponents also express concern that
people who do not really need help, or who are not perceived to deserve help, will unfairly take
advantage of government foreclosure prevention programs. They argue that taxpayers’ money
should not be used to help people who can still afford their loans but want to get more favorable
terms, people who may be seeking to pass their losses on to the lender or the taxpayer, or people
who knowingly took on mortgages that they could not afford.
Despite the concerns surrounding foreclosure prevention programs, and disagreement over the
proper role of the government in preserving homeownership, Congress and the executive branch
have both recently taken actions aimed at preventing foreclosures. Many private companies and
state and local governments have also undertaken their own foreclosure prevention efforts. This
report describes why so many households are currently at risk of foreclosure, outlines recent
government and private initiatives to help homeowners remain in their homes, and discusses
some of the challenges inherent in designing successful foreclosure prevention plans.
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There are many reasons that a household might fall behind on its mortgage payments. Some
borrowers may have simply taken out loans on homes that they could not afford. However, many
homeowners who believed they were acting responsibly when they took out a mortgage
nonetheless find themselves facing foreclosure. The reasons households might have difficulty
making their mortgage payments include changes in personal circumstances, which can be
exacerbated by macroeconomic conditions, and features of the mortgages themselves.
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Changes in a household’s circumstances can affect its ability to pay its mortgage. For example, a
number of events can leave a household with a lower income than it anticipated when it bought
its home. Such changes in circumstances can include a lost job, an illness, or a change in family

6 Representative Spencer Bachus, “Remarks of Ranking Member Spencer Bachus During Full Committee Hearing on
Loan Modifications,” press release, November 12, 2008, http://bachus.house.gov/HoR/AL06/Press+Room/
Press+Releases/2008/
111208Remarks+of+Ranking+Member+Spencer+Bachus+During+Full+Committee+Hearing+on+Loan+Modifications
.htm.
7 Senator Chris Dodd, “Dodd Statement on Government Loan Modification Program,” statement, November 11, 2008,
http://dodd.senate.gov/?q=node/4620.
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structure due to divorce or death. Families that expected to maintain a certain level of income
may struggle to make payments if a household member loses a job or faces a cut in pay, or if a
two-earner household becomes a single-earner household. Unexpected medical bills or other
unforeseen expenses can also make it difficult for a family to stay current on its mortgage.
Furthermore, sometimes a change in circumstances means that a home no longer meets a family’s
needs, and the household needs to sell the home. These changes can include having to relocate for
a job or needing a bigger house to accommodate a new child or an aging parent. Traditionally,
households that needed to move could usually sell their existing homes. However, the recent
decline in home prices in many communities nationwide has left some homeowners
“underwater,” meaning that borrowers owe more on their homes than the house is worth. This
limits homeowners’ ability to sell their homes if they have to move; many of these families are
effectively trapped in their current home and mortgage because they cannot afford to sell their
home at a loss.
The risks presented by changing personal circumstances have always existed for anyone who
took out a loan, but deteriorating macroeconomic conditions, such as falling home prices and
increasing unemployment, have made families especially vulnerable to losing their homes for
such reasons. The fall in home values that has left some homeowners owing more than the value
of their homes not only traps those people in their current homes; it also makes it difficult for
homeowners to sell their homes in order to avoid a foreclosure, and it increases the incentive for
homeowners to walk away from their homes if they can no longer afford their mortgage
payments. Along with the fall in home values, another recent macroeconomic trend has been
increasing unemployment. More households experiencing job loss and the resultant income loss
has made it difficult for many families to keep up with their monthly mortgage payments.
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Borrowers might also find themselves having difficulty staying current on their loan payments
due in part to features of their mortgages. In the last several years, there has been an increase in
the use of alternative mortgage products whose terms differ significantly from the traditional 30-
year, fixed interest rate mortgage model.8 While borrowers with traditional mortgages are not
immune to delinquency and foreclosure, many of these alternative mortgage features seem to
have increased the risk that a homeowner will have trouble staying current on his or her
mortgage. Many of these loans were structured to have low monthly payments in the early stages
and then adjust to higher monthly payments depending on prevailing market interest rates and/or
the length of time the borrower held the mortgage. Furthermore, many of these mortgage features
made it more difficult for homeowners to quickly build equity in their homes. Some examples of
the features of these alternative mortgage products are listed below.
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With an adjustable-rate mortgage (ARM), a borrower’s interest rate can change at predetermined
intervals, often based on changes in an index. The new interest rate can be higher or lower than

8 For a fuller discussion of these types of mortgage products and their effects, see CRS Report RL33775, Alternative
Mortgages: Causes and Policy Implications of Troubled Mortgage Resets in the Subprime and Alt-A Markets, by
Edward V. Murphy.
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the initial interest rate, and monthly payments can also be higher or lower based on both the new
interest rate and any interest rate or payment caps.9 Some ARMs also include an initial low
interest rate known as a teaser rate. After the initial low-interest period ends and the new interest
rate kicks in, the monthly payments that the borrower must make may increase, possibly by a
significant amount.
Adjustable-rate mortgages make economic sense for some borrowers, especially if interest rates
are expected to go down in the future. ARMs can help people own a home sooner than they may
have been able to otherwise, or make sense for borrowers who cannot afford a high loan payment
in the present but expect a significant increase in income in the future that would allow them to
afford higher monthly payments. Furthermore, the interest rate on ARMs tends to follow short-
term interest rates in the economy; if the gap between short-term and long-term rates gets very
wide, it might make sense for borrowers to choose an ARM even if they expect interest rates to
rise in the future. Finally, in markets with rising property values, borrowers with ARMs may be
able to refinance their mortgages to avoid higher interest rates or large increases in monthly
payments. However, if home prices fall, refinancing and selling the home to pay off the debt may
not be feasible, and homeowners can find themselves stuck with higher mortgage payments.
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As the name suggests, zero-downpayment and low-downpayment loans require either no
downpayment or a significantly lower downpayment than has traditionally been required. These
types of loans make it easier for homebuyers who do not have a lot of cash up-front to purchase a
home. This type of loan may be especially useful in areas where home prices are rising more
rapidly than income, because it allows borrowers without enough cash for a large downpayment
to enter markets they could not otherwise afford. However, a low- or no-downpayment loan also
means that families have little or no equity in their homes in the early phases of the mortgage,
making it difficult to sell or refinance the home in response to a change in circumstances if home
prices decline. Such loans may also mean that a homeowner takes out a larger mortgage than he
or she would otherwise.
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With an interest-only loan, borrowers pay only the interest on a mortgage—but no part of the
principal—for a set period of time. This option increases the homeowner’s monthly payments in
the future, after the interest-only period ends and the principal amortizes. These types of loans
limit a household’s ability to build equity in its home, making it difficult to sell or refinance the
home in response to a change in circumstances if home prices are declining.
With a negative amortization loan, borrowers have the option to pay less than the full amount of
the interest due for a set period of time. The loan “negatively amortizes” as the remaining interest
is added to the outstanding loan balance. Like interest-only loans, this option increases future
monthly mortgage payments when the principal and the balance of the interest amortizes. These

9 Even if the interest rate remains the same or decreases, it is possible for monthly payments to increase if prior
payments were subject to an interest rate cap or a payment cap. This is because unpaid interest that would have accrued
if not for the cap can be added to the principal loan amount, resulting in negative amortization. For more information
on the many variations of adjustable rate mortgages, see The Federal Reserve Board, Consumer Handbook on
Adjustable Rate Mortgages, http://www.federalreserve.gov/pubs/arms/arms_english.htm#drop.
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types of loans can be useful in markets where property values are rising rapidly, because
borrowers can enter the market and then use the equity gained from rising home prices to
refinance into loans with better terms before payments increase. They can also make sense for
borrowers who currently have low incomes but expect a significant increase in income in the
future. However, when home prices stagnate or fall, interest-only loans and negative amortization
loans can leave borrowers with negative equity, making it difficult to refinance or sell the home to
pay the mortgage debt.
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Alt-A loans are mortgages that are similar to prime loans, but for one or more reasons do not
qualify for prime interest rates. One example of an Alt-A loan is a low-documentation or no-
documentation loan. These are loans to borrowers with good credit scores but little or no income
or asset documentation. Although no-documentation loans allow for more fraudulent activity on
the part of both borrowers and lenders, they may be useful for borrowers with income that is
difficult to document, such as those who are self-employed or work on commission. Other
examples of Alt-A loans are loans with high loan-to-value ratios or loans to borrowers with credit
scores that are too low for a prime loan but high enough to avoid a subprime loan. In all of these
cases, the borrower is charged a higher interest rate than he or she would be charged with a prime
loan.
Many of these loan features may have played a role in the recent increase in foreclosure rates.
Some homeowners were current on their mortgages before their monthly payments increased due
to interest rate resets or the end of option periods. Some built up little equity in their homes
because they were not paying down the principal balance of their loan or because they had not
made a downpayment. Stagnant or falling home prices in many regions also hampered borrowers’
ability to build equity in their homes. Borrowers without sufficient equity find it difficult to take
advantage of options such as refinancing into a more traditional mortgage if monthly payments
become too high or selling the home if their personal circumstances change.
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When a household falls behind on its mortgage, there are options that lenders or servicers10 may
be able to employ as an alternative to beginning foreclosure proceedings. Some of these options,
such as a short sale and a deed-in-lieu of foreclosure,11 allow homeowners to avoid having a
foreclosure on their record but still result in a household losing its home. This section describes

10 Mortgage lenders are the organizations that make mortgage loans to individuals. Often, the mortgage is managed by
a separate company known as a servicer; servicers usually have the most contact with the borrower, and are responsible
for actions such as collecting mortgage payments, initiating foreclosures, and communicating with troubled borrowers.
Finally, many mortgages are repackaged into mortgage-backed securities (MBS) that are sold to institutional investors.
Servicers are usually subject to contracts with mortgage lenders and MBS investors that may limit their ability to
undertake loan workouts or modifications; the scope of such contracts and the obligations that servicers must meet vary
widely.
11 In a short sale, a household sells its home for less than the amount it owes on its mortgage, and the lender generally
accepts the proceeds from the sale as payment in full on the mortgage even though it is taking a loss. A deed-in-lieu of
foreclosure refers to the practice of a borrower turning the deed to the house over to the lender, which accepts the deed
as payment of the mortgage debt.
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methods of avoiding foreclosure that allow homeowners to keep their homes; these options
generally take the form of repayment plans or loan modifications.
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A repayment plan allows a delinquent borrower to become up-to-date on his or her loan by paying
back the payments he or she has missed, along with any accrued late fees. This is different from a
loan modification, which changes one or more of the terms of the loan (such as the interest rate).
Under a repayment plan, the missed payments and late fees may be paid back after the rest of the
loan is paid off, or they may be added to the existing monthly payments. The first option
increases the time that it will take for a borrower to pay back the loan, but his or her monthly
payments will remain the same. The second option may result in an increase in monthly
payments. Repayment plans may be a good option for homeowners who experienced a temporary
loss of income but are now financially stable. However, since they do not generally make
payments more affordable, repayment plans are unlikely to help homeowners with unaffordable
loans avoid foreclosure in the long term.
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Principal forbearance means that a lender or servicer removes part of the principal from the
portion of the loan balance that is subject to interest, thereby lowering borrowers’ monthly
payments by reducing the amount of interest owed. The portion of the principal that is subject to
forbearance still needs to be repaid by the borrower in full, usually after the interest-bearing part
of the loan is paid off or when the home is sold. Because principal forbearance does not actually
change any of the loan terms, it resembles a repayment plan more than a loan modification.
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A principal write-down is a type of mortgage modification that lowers borrowers’ monthly
payments by forgiving a portion of the loan’s principal balance. The forgiven portion of the
principal never needs to be repaid. Because the borrower now owes less, his or her monthly
payment will be smaller. This option is costly for lenders but can help borrowers achieve
affordable monthly payments, as well as increase the stake borrowers have in their homes and
therefore increase their desire to stay current on the mortgage and avoid foreclosure.12
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Another form of loan modification is when the lender voluntarily lowers the interest rate on a
mortgage. This is different from a refinance, in which a borrower takes out a new mortgage with a
lower interest rate and uses the proceeds from the new loan to pay off the old loan. Unlike
refinancing, a borrower does not have to pay closing costs or qualify for a new loan to get an
interest rate reduction, which makes interest rate reductions a good option for borrowers who owe

12 Historically, one impediment to principal forgiveness has been that borrowers were required to claim the forgiven
amount as income, and therefore had to pay taxes on that income. Congress recently passed legislation that excludes
mortgage debt forgiven before January 1, 2013 from taxable income. For more information about the tax treatment of
principal forgiveness, see CRS Report RL34212, Analysis of the Tax Exclusion for Canceled Mortgage Debt Income,
by Mark P. Keightley and Erika Lunder.
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more on their mortgages than their homes are worth. With an interest rate reduction, the interest
rate can be reduced permanently, or it can be reduced for a period of time before increasing again
to a certain fixed point. Lenders can also freeze interest rates at their current level in order to
avoid impending costly interest rate resets on adjustable rate mortgages. Interest rate
modifications are relatively costly to the lender, but they can be effective at reducing monthly
payments to an affordable level.
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Another option for lowering monthly mortgage payments is extending the amount of time over
which the loan is paid back. While extending the loan term increases the total cost of the
mortgage for the borrower because more interest will accrue, it allows monthly payments to be
smaller because they are paid over a longer period of time. Most mortgages in the U.S. have an
initial loan term of 25 or 30 years; extending the loan term from 30 to 40 years, for example,
could result in a lower monthly mortgage payment for the borrower.
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To date, federal, state, and local governments have created a number of programs to attempt to
stem the rise in foreclosures and help more homeowners remain in their homes. This section
describes recent federal programs and briefly outlines some state and local foreclosure prevention
efforts.
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On August 31, 2007, the Federal Housing Administration (FHA) announced FHASecure, a
temporary program allowing delinquent borrowers with non-FHA adjustable-rate mortgages
(ARMs) to refinance into FHA-insured fixed-rate mortgages.13 The new mortgage helps
borrowers by offering better loan terms that either reduce a borrower’s monthly payments or help
a borrower avoid steep payment increases under his or her old loan. FHASecure expired on
December 31, 2008.
To qualify for FHASecure, borrowers originally had to meet the following eligibility criteria:
• The borrower had a non-FHA ARM that had reset.
• The borrower became delinquent on his or her loan due to the reset, and had
sufficient income to make monthly payments on the new FHA-insured loan.
• The borrower was current on his or her mortgage prior to the reset. (Some
borrowers with a minimum amount of equity in their homes could still be eligible
for the program even if they had missed payments prior to the reset.)

13 FHA already offered refinancing options for homeowners who were current on their existing fixed- or adjustable-rate
mortgages and continued to do so after the adoption of FHASecure.
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• The new loan met standard FHA underwriting criteria and was subject to other
standard FHA requirements (including maximum loan-to-value ratios, mortgage
limits, and up-front and annual mortgage insurance premiums).
In July 2008, FHA expanded its eligibility criteria for the program, and borrowers had to meet the
following revised eligibility requirements:
• The borrower became delinquent on his or her non-FHA ARM because of an
interest rate reset or another extenuating circumstance, and had sufficient income
to make monthly payments on the new FHA-insured loan.
• The borrower had no more than two payments that were thirty days late, or one
payment that was sixty days late, in the twelve months preceding the interest rate
reset or other extenuating circumstance.
• If the loan-to-value ratio on the FHA-insured mortgage was no higher than 90%,
the borrower may have had no more than three payments that were thirty days
late, or one payment that was ninety days late, prior to the interest rate reset or
other extenuating circumstance.
• Borrowers with interest-only ARMs or option ARMs must have been delinquent
due to an interest rate reset only (and not other extenuating circumstances), and
must have been current on their mortgages prior to the reset; the revised
eligibility criteria do not apply to these borrowers.
• The new loan met standard FHA underwriting criteria and was subject to other
standard FHA requirements (including maximum loan-to-value ratios, mortgage
limits, and up-front and annual mortgage insurance premiums).

FHASecure expired on December 31, 2008. In the months before its expiration, some
housing policy advocates called for the program to be extended; however, HUD officials
contended that continuing the program would be prohibitively expensive, possibly
endangering FHA’s single-family mortgage insurance program. HUD also points to the
Hope for Homeowners program, described below, as filling the role that FHASecure did
in helping households avoid foreclosure.14 Supporters of extending FHASecure argue that
the statutory requirements of Hope for Homeowners may offer less flexibility in the face
of changing circumstances than FHASecure, which could have been more easily amended
by HUD.
When FHASecure expired at the end of 2008, about 4,000 loans had been refinanced
through the program.15 Critics of the program point to the relatively stringent criteria that
borrowers had to meet to qualify for the program as a possible reason that more people
did not take advantage of it.

14 HUD Mortgagee Letter 08-41, “Termination of FHASecure,” December 19, 2008, available at http://www.hud.gov/
offices/adm/hudclips/letters/mortgagee/2008ml.cfm.
15 Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2009 to 2019,” January 2009,
available at http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf.
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On July 11, 2008, the Office of Thrift Supervision in the Department of the Treasury closed
IndyMac Federal Savings Bank, based in Pasadena, California, and placed it under the
conservatorship of the Federal Deposit Insurance Corporation (FDIC). In August 2008, the FDIC
put into place a loan modification program for holders of mortgages either owned or serviced by
IndyMac that were seriously delinquent or in danger of default, or on which the borrower was
having trouble making payments because of interest rate resets or a change in financial
circumstances.
The IndyMac program offers systematic loan modifications to qualified borrowers in financial
trouble. The systematic approach means that all loan modifications follow the same basic formula
to identify qualified borrowers and reduce their monthly payments in a uniform way. Such an
approach is meant to allow more modifications to happen more quickly than if each loan was
modified on a case-by-case basis.
In order to be eligible for a loan modification, the mortgage must be for the borrower’s primary
residence and the borrower must provide current income information that documents financial
hardship. Furthermore, the expected future cost of the loan modification to the FDIC and the
mortgage investors must be less than the expected future cost of foreclosure. This is sometimes
referred to as the “net present value test,” and it helps determine whether a loan modification
makes financial sense for the lender as well as the borrower.
If a borrower meets the above conditions, the loan is modified so that he or she has a mortgage
debt-to-income ratio (DTI) of 38%, meaning that the borrower’s monthly mortgage payments
(including principal, interest, taxes, and insurance) cannot exceed 38% of his or her monthly
income. The goal is to lower a borrower’s monthly payments to a level that is sustainable based
on the borrower’s current income. The 38% DTI can be achieved by lowering the interest rate,
extending the period of the loan, forbearing a portion of the principal, or a combination of the
three. The interest rate is set at the Freddie Mac survey rate for conforming mortgages, but if
necessary it can be lowered for a period of up to five years in order to reach the 38% DTI; after
the five-year period, the interest rate rises by no more than 1% each year until it reaches the
Freddie Mac survey rate.
As of mid-December 2008, 7,500 loan modifications had been completed out of an estimated
40,000 eligible mortgages, and FDIC Chairman Sheila Bair expected “thousands” more to be
modified in subsequent months.16 On January 2, 2009, the FDIC announced an agreement to sell
IndyMac to a group of investors. The new owners are required to continue the loan modification
program after the sale.17

16 Remarks by FDIC Chairman Sheila Bair to the New America Foundation conference “Did Low-Income Home
Ownership Go Too Far?”: Washington, D.C. , December 17, 2008. A transcript of these remarks is available at
http://www.fdic.gov/news/news/speeches/archives/2008/chairman/spdec1708.html.
17 Federal Deposit Insurance Corporation, “FDIC Board Approves Letter of Intent to Sell IndyMac Federal,” press
release, January 2, 2009, http://www.fdic.gov/news/news/press/2009/pr09001.html.
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Congress created the Hope for Homeowners program in the Housing and Economic Recovery Act
of 2008 (P.L. 110-289), which was signed into law on July 30, 2008. The program, which is
voluntary on the part of both borrowers and lenders, offers certain borrowers the ability to
refinance into new mortgages insured by FHA if their lenders agree to certain loan modifications.
The Hope for Homeowners program began on October 1, 2008, and will remain in place until
September 30, 2011. In order to be eligible for the program, borrowers must meet the following
requirements:
• The borrower must have a mortgage that originated on or before January 1, 2008.
• The borrower’s mortgage payments must have been more than 31% of their gross
monthly income as of March 1, 2008.
• The borrower must not own another home.
• The borrower must not have intentionally defaulted on his or her mortgage, and
he or she must not have been convicted of fraud during the last ten years under
either federal or state law.
• The borrower must not have provided false information to obtain the original
mortgage.
Under the original terms of the program, the lender agreed to write the mortgage down to 90% of
the home’s currently appraised value. The home therefore must be reappraised by an FHA-
approved home appraiser in order to determine its current value, and the lender absorbs whatever
loss results from this write-down. The new mortgage is a 30-year fixed-rate mortgage with no
prepayment penalties, and may not exceed $550,440. Any second lien-holders were required to
release their lien in exchange for a share of any future profit when the home is eventually sold.
The homeowner pays an upfront mortgage insurance premium of 3%, and an annual mortgage
insurance premium of 1.5%. When the homeowner sells or refinances the home, he or she must
share between 50% and 100% of the proceeds with HUD depending on the length of time that
passes between the time the borrower enters the program and when he or she sells the home. After
one year, 100% of the equity in the home and any home value appreciation is shared with FHA,
while after five years, only 50% is shared with FHA.
On November 19, 2008, HUD announced three changes to Hope for Homeowners in order to
simplify the program and encourage participation.18 These changes did the following: (1)
increased the maximum loan-to-value ratio of the new loan to 96.5% of the home’s currently
appraised value, instead of the original 90%, in order to minimize losses to lenders; (2) allowed
lenders to increase the term of the mortgage from 30 to 40 years in order to lower borrowers’
monthly payments; and (3) offered an immediate payment to second lien-holders, instead of a
share in future profits, in return for their agreement to relinquish the lien.

18 The authority to make these changes to Hope for Homeowners was granted in P.L. 110-343, the Emergency
Economic Stabilization Act of 2008. The decision to make the changes was ultimately made by the Board of Hope for
Homeowners, which includes the Secretary of HUD and the Secretary of the Treasury, among others.
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The CBO originally estimated that up to 400,000 homeowners could be helped to avoid
foreclosure over the life of the program.19 As of February 3, 2009, the program had received 451
applications and 25 new mortgages had closed.20 Some have suggested that more borrowers and
lenders have not used Hope for Homeowners because the program requires so many players to
take losses: lenders must write down part of the principal, and borrowers must share future equity
in their homes and any home price appreciation. Others have suggested that borrowers and
lenders have been hesitant to use the program as long as interest in developing other foreclosure
prevention plans continues, in case a new plan is enacted that offers more favorable terms.
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On November 11, 2008, James Lockhart, the director of the Federal Housing Finance Agency
(FHFA), which oversees Fannie Mae and Freddie Mac,21 announced a new Streamlined
Modification Program (SMP) that Fannie, Freddie, and certain private mortgage lenders and
servicers planned to undertake.22 Fannie Mae and Freddie Mac had helped troubled borrowers
through individualized loan modifications for some time, but the SMP represents an attempt to
formalize the process and set an industry standard. The SMP took effect on December 15, 2008.
On November 20, 2008, Fannie Mae and Freddie Mac also announced that they would suspend
foreclosure sales and evictions between November 26, 2008 and January 9, 2009, in order to have
time to reach out to borrowers who might be eligible for loan modifications under the SMP.
Fannie and Freddie later extended the moratorium through the end of February 2009.
In order for borrowers whose mortgages are owned by Fannie Mae or Freddie Mac to be eligible
for the SMP, they must meet the following criteria:
• The mortgage must have originated on or before January 1, 2008.
• The mortgage must have a loan-to-value ratio of at least 90%.
• The home must be a single-family residence occupied by the borrower, and it
must be the borrower’s primary residence.
• The borrower must have missed at least three mortgage payments.
• The borrower must not have filed for bankruptcy.

19 Congressional Budget Office, Cost Estimate, Federal Housing Finance Regulatory Reform Act of 2008, June 9,
2008, p. 8, http://www.cbo.gov/ftpdocs/93xx/doc9366/Senate_Housing.pdf.
20 Written statement of Meg Burns, Director, Office of Single Family Program Development, U.S. Department of
Housing and Urban Development, testimony before the U.S. Congress, House Committee on Financial Services,
Promoting Bank Liquidity and Lending through Deposit Insurance, Hope for Homeowners, and other Enhancements,
111th Cong., 1st sess., February 3, 2009, http://www.house.gov/apps/list/hearing/financialsvcs_dem/burns020309.pdf.
21 Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that were chartered by Congress to
provide liquidity to the mortgage market. Rather than make loans directly, the GSEs buy loans made in the private
market and either hold them in their own portfolios or securitize and sell them to investors. The GSEs were put under
the conservatorship of FHFA on September 7, 2008. For more information on the GSEs in general, see CRS Report
RL33756, Fannie Mae and Freddie Mac: A Legal and Policy Overview, by N. Eric Weiss and Michael V. Seitzinger,
and for more information on the conservatorship, see CRS Report RS22950, Fannie Mae and Freddie Mac in
Conservatorship, by Mark Jickling.
22 The private mortgage lenders and servicers who are participating in the Streamlined Modification Program are
primarily members of the HOPE NOW Alliance, a voluntary alliance of industry members that formed to help
homeowners avoid foreclosure. The HOPE NOW Alliance, and its involvement with the SMP, is described in detail in
this report.
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Mortgages that are insured or guaranteed by the federal government, such as those guaranteed
FHA, the Veterans’ Administration, or the Rural Housing Service, are not eligible for the SMP.
The SMP shares many features of the FDIC’s plan to modify troubled mortgages held by
IndyMac. Borrowers who qualify for the program must provide income information that is
current within the last 90 days to the mortgage servicer. Based on this updated income
information, borrowers’ monthly mortgage payments will be lowered so that the household’s
mortgage debt-to-income ratio is 38% (this does not include second lien payments). After
borrowers successfully complete a three-month trial period (by making all of the payments at the
proposed modified payment amount), the loan modification automatically takes effect.
In order to reach the 38% mortgage debt-to-income ratio (DTI), servicers must follow a specific
formula. First, the servicer capitalizes late payments and accrued interest (late fees and penalties
must be waived). If this results in a DTI of 38% or less, the modification is complete. If the DTI
is higher than 38%, the servicer can extend the term of the loan to up to forty years from the
effective date of the modification. If the DTI is still above 38%, the interest rate can be adjusted
to the current market rate or lower, but no less than 3%. Finally, if the DTI is still above 38% after
the first three steps have been taken, servicers can offer principal forbearance. The amount of the
principal forbearance will not accrue interest and is non-amortizing, but it will result in a balloon
payment when the loan is paid off or the home is sold.
Negative amortization is not allowed under the SMP, nor are principal forgiveness or principal
write-downs. In order to encourage participation in the SMP, Fannie Mae and Freddie Mac will
pay servicers $800 for each loan modification completed through the program. If the SMP does
not produce an affordable payment for the borrower, servicers will work with borrowers in a
customized fashion to try to modify the loan in a way that the homeowner can afford.
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On January 27, 2009, the Federal Reserve announced a plan to prevent foreclosures on mortgages
it owns or controls, such as those it received as collateral for lending to troubled banks. According
to initial reports, the plan will use interest rate reductions, extensions of the loan term, and
principal forbearance and forgiveness to help struggling borrowers avoid foreclosure.
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Another federal effort to slow the rising number of foreclosures has been to appropriate funding
for housing counseling.23 This funding is primarily channeled through NeighborWorks America, a
non-profit created by Congress in 1978 that has a national network of community partners.
NeighborWorks traditionally provides housing counseling to homebuyers and homeowners, and
since 2004 has also provided foreclosure intervention counseling. NeighborWorks also trains
other non-profit housing counseling organizations in foreclosure counseling.

23 For each of the past several years, Congress has appropriated funding for various types of housing counseling,
including pre-purchase counseling and post-purchase counseling, to be distributed to housing counseling agencies that
have been certified by the Department of Housing and Urban Development.

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The Housing and Economic Recovery Act of 2008 (P.L. 110-289), appropriated $150 million for
NeighborWorks to distribute to qualified organizations for foreclosure prevention counseling
activities. P.L. 110-289 also appropriated an additional $30 million for NeighborWorks to
distribute to counseling organizations to provide legal help to homeowners facing delinquency or
foreclosure, giving priority to communities with the highest foreclosure rates and organizations
that could use the money quickly. These amounts are in addition to $180 million appropriated to
NeighborWorks in the Consolidated Appropriations Act 2008 (P.L. 110-161) to distribute for
foreclosure prevention activities, with a focus on areas with high foreclosure rates and on the
subprime market.
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In addition to federal efforts to prevent foreclosures, a number of state and local governments
have implemented their own programs aimed at helping homeowners stay in their homes. Some
of these efforts include supporting voluntary or mandatory pre-foreclosure counseling initiatives,
imposing foreclosure moratoriums, providing short-term loans to help homeowners at risk of
foreclosure, enacting stronger reporting requirements on lenders’ loan modification efforts, and
initiating legal actions. Many states and localities have also implemented educational efforts to
reach out to troubled homeowners.
According to the Pew Charitable Trusts Center on the States, as of April 2008, twenty states have
laws or regulations involving foreclosure mitigation, 24 states have statewide counseling efforts,
13 states have a foreclosure intervention hotline, and 9 states have developed loan funds to help
homeowners refinance into more affordable mortgages or to provide short-term loans to
borrowers facing foreclosure. Furthermore, at least 14 states have created foreclosure prevention
task forces to attempt to address the problem of rising foreclosure rates.24
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While the government has initiated the mortgage modification programs described above, a
number of private mortgage lenders and servicers have voluntarily attempted to implement their
own foreclosure prevention initiatives. Many private lenders have engaged in ongoing individual
loan modifications for some time, but have recently launched more targeted programs to help
troubled borrowers. This section describes some of these programs in order to provide illustrative
examples of private sector initiatives to prevent foreclosures; it is not intended to be a
comprehensive list of private foreclosure prevention efforts.
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The HOPE NOW Alliance is a voluntary alliance of mortgage servicers, lenders, investors,
counseling agencies, and others that formed in October 2007. The alliance is a private sector
initiative created with the encouragement of the federal government to engage in active outreach
efforts to troubled borrowers. Member organizations identify borrowers who may have difficulty
making loan payments before they became seriously delinquent on their mortgages, and work

24 The Pew Charitable Trusts Center on the States, Defaulting on the Dream: States Respond to America's Foreclosure
Crisis, April 2008,
http://www.pewcenteronthestates.org/uploadedFiles/PCS_DefaultingOnTheDream_Report_FINAL041508_01.pdf.
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with such borrowers to work out loan modifications that can keep the borrowers in their homes.
When the alliance was first announced, eleven mortgage servicers were involved; by November
2008, twenty-seven servicers had become member organizations.
HOPE NOW Alliance members have undertaken several initiatives to help troubled homeowners.
One such initiative the alliance has supported is a hotline, operated by the Homeownership
Preservation Foundation, that connects borrowers to HUD-approved housing counselors who can
help homeowners contact their servicers and work out a plan to avoid foreclosure. The hotline
serves as a first point of contact for troubled borrowers, and both HUD and non-profit
organizations such as NeighborWorks America advocate its use.25
HOPE NOW also encourages its lenders and servicers to coordinate their efforts to modify
mortgages. On December 6, 2007, the HOPE NOW Alliance announced a streamlined plan that
would allow servicers to freeze the interest rate on certain subprime ARMs for borrowers who
were current on their mortgages but would not be able to afford higher payments after their rates
reset. While the plan received assurances from the government that the modifications would not
affect certain accounting or tax issues surrounding securitized loans, servicers who went forward
with modifications could not be certain that investors would not mount legal challenges.26 Most
recently, HOPE NOW announced on November 11, 2008 that most of its servicers would
participate in the SMP, with the idea that the plan will create a new industry-wide approach to
mortgage modifications.
According to HOPE NOW’s own reports, the alliance expected to prevent 2.2 million
foreclosures and complete almost 950,000 loan modifications in 2008 through these efforts.27
However, some of these prevented foreclosures are the result of solutions other than loan
modifications. These other solutions could include repayment plans, under which it is possible
that some borrowers could end up with higher, not lower, monthly payments, and which may not
substantially reduce the risk that these homeowners will eventually end up in default or
foreclosure. They could also involve short sales or deeds-in-lieu-of-foreclosure, in which the
homeowner avoids having a foreclosure on his or her financial record but still loses the home.
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On October 6, 2008, Bank of America announced a loan modification program for homeowners
whose mortgages are serviced by Countrywide (Countrywide was acquired by Bank of America
on July 1, 2008.)28 The program became effective December 1, 2008, and targets borrowers who
are seriously delinquent, or in danger of becoming seriously delinquent, on their mortgages due to
loan features such as interest rate resets.

25 The phone number for the HOPE NOW Alliance hotline is 888-995-HOPE (4673).
26 For more information on the tax and accounting issues surrounding this plan, see CRS Report RL34372, The HOPE
NOW Alliance/American Securitization Forum (ASF) Plan to Freeze Certain Mortgage Interest Rates, by David H.
Carpenter and Edward V. Murphy.
27 The HOPE NOW Alliance, “HOPE NOW Projects Big Increases in Foreclosure Prevention Successes in 2009,”
press release, Dec. 22, 2008, available online at
http://hopenow.com/upload/press_release/files/HOPE%20NOW%202008%20Year%20End%20Release.pdf.
28 Bank of America, “Bank of America Announces Nationwide Homeownership Retention Program for Countrywide
Customers,” press release, October 6, 2008,
http://newsroom.bankofamerica.com/index.php?s=press_releases&item=8272.
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The Bank of America program aims to reduce borrowers’ mortgage debt to no more than 34% of
gross monthly income for the first year of the modification. Subsequent rises in the interest rate or
other loan terms are structured in a way that minimizes payment shock to the borrower. Types of
loan modifications can include using the Hope for Homeowners program, described above, to
help homeowners refinance into FHA-insured mortgages; reducing the interest rate; and reducing
the principal balance on option-ARMs. Eligibility for the program is limited to primary
residences.
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On October 31, 2008, JP Morgan Chase announced an expansion of its foreclosure prevention
efforts.29 This expansion includes reaching out to borrowers before they begin to miss payments,
and conducting a systematic review of all of the mortgages held by Chase to ascertain which
borrowers might be eligible for loan modifications. Chase will offer troubled borrowers a
combination of reductions in their interest rate and principal forbearance, and will review each
mortgage before it enters the foreclosure process to ensure that eligible borrowers were offered
loan modifications. Chase specifically excludes negative amortization as a loan modification
option. Chase also announced that it would not begin any foreclosures while the expanded
program was being implemented.
In order to be eligible for a loan modification, borrowers must have a mortgage that is owned by
Chase, Washington Mutual, or EMC. (EMC and Washington Mutual were acquired by JP Morgan
Chase in March 2008 and September 2008, respectively.) If a borrower’s mortgage is serviced,
but not owned, by one of these companies, the investors must give permission for the loan to be
modified. To be eligible, borrowers must occupy the home as their primary residence.
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On November 11, 2008, Citigroup announced that it was streamlining its existing mortgage
modification program in the mold of the IndyMac loan modification model.30 Under the
streamlined program, Citigroup uses a formula to arrive at a certain mortgage payment-to-income
ratio, and then uses a combination of interest rate reductions, extensions of the loan term, or
forgiveness of part of the principal in order to reach that ratio. Citigroup also announced the Citi
Homeowner Assistance program, in which it pledged to reach out to borrowers who were not yet
delinquent on their mortgages but who were in danger of falling behind on their loan payments.
Through this program, Citigroup plans to concentrate its efforts on geographic areas that are
especially economically hard-hit, such as those areas experiencing steep home price declines or
rapid rises in unemployment. Finally, Citigroup has announced a foreclosure moratorium in order
to give it more time to reach out to borrowers and complete loan modifications.
Currently, these programs are in effect for mortgage loans that Citigroup owns. Citi is working
with investors to expand the program to includes mortgages that are serviced, but not owned, by
Citigroup.

29 JP Morgan Chase, “Chase Further Strengthens Robust Programs to Keep Families in Homes,” press release, October
31, 2008, http://files.shareholder.com/downloads/ONE/514430481x0x245621/b879b4eb-40c0-43f8-8614-
6f2113759d0c/344473.pdf.
30 Citigroup, “Citi Announces New Preemptive Initiatives to Help Homeowners Remain in Their Homes,” press
release, November 11, 2008, http://www.citigroup.com/citi/press/2008/081111a.htm.
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Some observers argue that the programs outlined above, which have already been implemented
by various government and private organizations, have not been effective enough at stopping the
rising foreclosure rate and keeping people in their homes. There have been calls for the
government to do more to help homeowners. This section briefly outlines some existing proposals
for further action to help prevent foreclosures.
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One method that has been suggested to help more homeowners remain in their homes is to amend
bankruptcy law to allow a judge to order a mortgage loan modification as part of a bankruptcy
proceeding. Bankruptcy judges currently have the authority to modify or reduce other types of
outstanding debt obligations, including mortgages on second homes and vacation homes, but this
authority does not extend to mortgages on primary residences. Opponents of such a change do not
want judges to have such broad power to amend a contract after the fact. They argue that allowing
these “cramdowns” would make lenders more hesitant to make mortgage loans in the future,
since the threat of a loan being modified in this way could make mortgage lending more risky.
Supporters of amending bankruptcy law say that, in addition to helping a borrower in bankruptcy
avoid foreclosure through a court-mandated loan modification, such a change might also
encourage lenders to work with borrowers to modify loans before the bankruptcy process begins
in the first place. (For a description of the bankruptcy process and recent legislative proposals to
amend bankruptcy law to allow judges to order mortgage modifications, see CRS Report
RL34301, The Primary Residence Exception: Legislative Proposals in the 111th Congress to
Amend the Bankruptcy Code to Allow the Strip Down of Certain Home Mortgages, by David H.
Carpenter.)
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Some advocates have called for placing a temporary moratorium on foreclosure completions.
Proponents of this idea argue that placing a freeze on foreclosure completions would give
homeowners and lenders more time to work out sustainable loan modifications that would allow
the homeowner to remain in the home and turn troubled mortgages back into performing loans
that benefit the lenders. Opponents of a foreclosure moratorium argue that the government should
not interfere with the right of a lender to complete foreclosure proceedings against a borrower
who has defaulted on his or her loan. They note that delaying foreclosure proceedings through a
foreclosure moratorium could result in greater losses for the lender if the ultimate outcome is still
a foreclosure and the home’s price has fallen further in the interim.
Fannie Mae, Freddie Mac, and some private lenders have instituted temporary foreclosure
moratoriums while they put foreclosure prevention programs in place. While a wider foreclosure
moratorium had widely been considered a radical idea until recently, the severity of the increase
in foreclosures and its impact on the economy has led some to give the idea serious consideration.
(For an analysis of the economic principals behind a foreclosure moratorium, see CRS Report
RL34653, Economic Analysis of a Mortgage Foreclosure Moratorium, by Edward V. Murphy.
For an analysis of the legal issues involved, see CRS Report RL34369, Constitutional Issues
Relating to Proposals for Foreclosure Moratorium Legislation That Affects Existing Mortgages,
by David H. Carpenter.)
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As described earlier, the FDIC implemented a loan modification program for troubled
homeowners whose mortgages were owned by IndyMac after the agency took over the bank in
July 2008. Sheila Bair, chairman of the FDIC, has been a vocal advocate of implementing a wider
foreclosure prevention plan based on the IndyMac model. According to Chairman Bair, a plan in
which the government guarantees modified loans could help 1.5 million homeowners remain in
their homes at a cost of $24 billion.31 The FDIC plan would be a streamlined, methodical loan
modification program resembling the IndyMac program. However, it would be more widely
available to most homeowners who are having difficulty staying current on their mortgages, and
the government would provide guarantees on the modified mortgages. Like the IndyMac
program, homeowners would only be eligible for a loan modification if the lender would receive
a greater expected return through a loan modification than through foreclosure.
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The Emergency Economic Stabilization Act of 2008 (EESA, P.L. 110-343) was signed into law
on October 3, 2008, and created the Troubled Assets Relief Program (TARP). A stated purpose of
EESA is “preserv[ing] homeownership.”32 Some policymakers have suggested using TARP funds
to directly fund foreclosure prevention programs, or using the funding and authority granted by
EESA to encourage their adoption by private entities.
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There are several challenges associated with designing successful programs to prevent
foreclosures. Some of these challenges are practical and concern issues surrounding the
implementation of loan modifications. Other challenges are more conceptual, and are related to
questions of fairness and precedent. This section describes some of the most prominent
considerations involved in programs to preserve homeownership.
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In recent years, the practice of lenders packaging mortgages into securities and selling them to
investors has become more widespread. This practice is known as securitization, and the
securities that include the mortgages are known as mortgage-backed securities (MBS). When
mortgages are sold through securitization, several players become involved with any individual
mortgage loan, including the lender, the servicer, and the investors who hold shares in the MBS.
The servicer is usually the organization that has the most contact with the borrower, including
receiving monthly payments and initiating any foreclosure proceedings. However, servicers are

31 Remarks by FDIC Chairman Sheila Bair to the New America Foundation conference “Did Low-Income Home
Ownership Go Too Far?”: Washington, D.C. , December 17, 2008. A transcript of these remarks is available at
http://www.fdic.gov/news/news/speeches/archives/2008/chairman/spdec1708.html.
32 P.L. 110-343, Division A, Section 2. This section will be codified at 12 U.S.C. § 5201.
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usually subject to contracts with investors which limit the activities that the servicer can
undertake and require it to safeguard the investors’ profit. One major question facing foreclosure
prevention programs, therefore, is who actually has the authority to make a loan modification.
Contractual obligations may limit the amount of flexibility that servicers have to modify loans in
ways that could arguably yield a lower return for investors. In some cases, loan modifications can
result in less of a loss for investors than foreclosure; however, lenders and servicers may not want
to risk having investors challenge their assessment that a modification is more cost-effective than
a foreclosure. This problem can be especially salient in streamlined programs in which large
numbers of loans are modified at once. With such streamlined programs, the cost-effectiveness of
loan modifications depends on questions such as how many loans would have likely ended up in
foreclosure without the modification, making it more difficult to say whether wholesale loan
modifications are in the best interest of investors.
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Another issue facing loan modification programs is the sheer number of delinquencies and
foreclosure proceedings underway. Lenders and servicers have a limited number of employees to
reach out to troubled borrowers and find solutions. Contacting borrowers—some of whom may
avoid contact with their servicer out of embarrassment or fear—and working out large numbers of
individual loan modifications can overwhelm the capacity of the lenders and servicers who are
trying to help homeowners avoid foreclosure. Streamlined plans that use a formula to modify all
loans that meet certain criteria may make it easier for lenders and servicers to help a greater
number of borrowers in a shorter amount of time. However, streamlined plans are more likely to
run into the contractual issues between servicers and investors described above.
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Another major challenge associated with loan modification programs is the possibility that a
homeowner who receives a modification will nevertheless default on the loan again in the future.
This possibility is especially problematic if the home’s value is falling, because in that case
delaying an eventual foreclosure reduces the value that the lender can recoup through a
foreclosure sale. Data released by the Comptroller of the Currency and the Office of Thrift
Supervision show that 37% of loans modified in the first quarter of 2008 were 30 or more days
delinquent again three months after the modification, and 55% were 30 or more days delinquent
six months after the modification. The same data show that a smaller percentage of modified
loans were 60 or more days delinquent: 19% of loans were 60 or more days delinquent three
months after the modification, and 37% were 60 or more days delinquent 60 or more days after
the modification.33 Opponents of aggressive loan modification programs point to these data as
evidence that loan modifications are not effective at preventing foreclosures. However,
proponents of such programs argue that the definition of loan modification used in these data is
overly broad, and that many of the modifications did not actually result in lower monthly
payments for the borrower.34 These supporters believe that loan modifications that focus on
creating truly affordable payments for troubled borrowers will exhibit lower rates of re-default.

33 Office of the Comptroller of the Currency and Office of Thrift Supervision, “OCC and OTS Mortgage Metrics
Report: Disclosure of National Bank and Federal Thrift Mortgage Loan Data, Third Quarter 2008,” December 2008,
pp. 18-19, available at http://www.occ.treas.gov/ftp/release/2008-150a.pdf.
34 Remarks by FDIC Chairman Sheila Bair to the New America Foundation conference “Did Low-Income Home
(continued...)
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Opponents of some foreclosure prevention plans argue that it is not fair to help homeowners who
have fallen behind on their mortgages while homeowners who have been scraping by to stay
current receive no help. Others argue that borrowers who got in over their heads, particularly if
they intentionally took out mortgages that they knew they could not afford, should face
consequences. Supporters of loan modification plans point out that many borrowers go into
foreclosure for reasons outside of their control, and that some troubled borrowers may have been
victims of deceptive, unfair, or fraudulent lending practices. Furthermore, a case can be made that
foreclosure prevention programs are necessary not only out of compassion for the homeowner,
but because foreclosures can create problems for other homeowners in the neighborhood by
dragging down property values or putting a strain on local governments.
To address these concerns about fairness, some loan modification programs reach out to
borrowers who are struggling to make payments but are not yet delinquent on their mortgage.
Most programs also specifically exclude individuals who provided false information in order to
obtain a mortgage.
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Another challenge is that loan modification programs may provide an incentive for borrowers to
intentionally miss payments or default on their mortgage in order to qualify for a loan
modification that provides more favorable mortgage terms. While many of the programs
described above, including Hope for Homeowners, specifically require that a borrower must not
have intentionally missed payments on his or her mortgage in order to qualify for the program, it
can be difficult to prove a person’s intention. Programs that are designed to reach out to distressed
borrowers before they miss any payments, as well as those who are already delinquent, may
minimize the incentive for homeowners to intentionally fall behind on their mortgage in order to
receive help.
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Some opponents of government efforts to provide or encourage loan modifications argue that
changing the terms of a contract retroactively sets a troubling precedent for future mortgage
loans. These opponents argue that if lenders believe that they could be forced to change the terms
of a mortgage in the future, they will be less likely to provide mortgage loans in the first place or
will only do so at higher interest rates to counter the perceived increase in the risk of not being
repaid in full. Most existing programs attempt to address this concern by limiting the program’s
scope. These programs apply only to mortgages that originated during a certain time frame, and
end at a pre-determined date.

(...continued)
Ownership Go Too Far?”: Washington, D.C. , December 17, 2008. A transcript of these remarks is available at
http://www.fdic.gov/news/news/speeches/archives/2008/chairman/spdec1708.html.
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Table A-1. Features of Selected Programs

Basic Eligibility
Program/Initiative
Requirements
Program Details
Status

FHASecure
Borrower had a non-FHA Borrower contacted
Announced August 31,
ARM
lender to determine
2007. Expired Dec. 31,
Borrower was delinquent eligibility
2008
due to an interest rate
Borrower refinanced into Estimated to have served
reset or other extenuating new, fixed-rate, FHA-
about 4,000 homeowners
circumstances
insured mortgage
Home was occupied as
Borrower’s new loan met
primary residence
standard FHA
Borrower had sufficient
underwriting criteria
income to pay new loan
Borrower met other
Borrower missed no more standard FHA
than a minimum number of requirements, such as
payments prior to reset or paying FHA insurance
onset of extenuating
premiums
circumstances (or had

sufficient equity in the
home)

FDIC IndyMac
Borrower has a loan
FDIC contacts eligible
Active; announced July 11,
modificatons
owned or serviced by
borrowers, but also
2008
IndyMac
encourages troubled
As of mid-December
Borrower is (1) seriously homeowners to contact
2008, had served about
delinquent or in danger of FDIC or IndyMac to see if 7,500 homeowners out of
default, or (2) having
they qualify
an estimated 40,000 who
trouble making mortgage
Mortgages are
were eligible; more
payments due to interest
systematically modified to modifications were
rate resets or changes in
achieve monthly payments expected to take place
financial circumstances
of no more than 38% of
Home is occupied as
borrowers’ monthly
primary residence
income
Borrower provides
Achieves 38% mortgage
current income
debt-to-income ratio by a
information documenting
combination of lowering
financial hardship
the interest rate,
extending the loan term,
Loan modification meets
or forbearing part of the
“net present value test,”
principal
meaning that the loan
modification must be less
costly for FDIC than
foreclosure
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Basic Eligibility
Program/Initiative
Requirements Program
Details Status
HOPE for Homeowners
Borrower has a non-FHA Borrower contacts lender Active; began October 1,
mortgage and lender
to determine eligibility
2008, and slated to expire
agrees to participate
Borrower refinances into
September 30, 2011
Borrower is at risk of
FHA-insured fixed rate
As of February 3, 2009,
default or foreclosure
mortgage for 96.5% of
451 applications had been
Home is occupied as
home’s currently appraised received and 25 loans had
primary residence
value (mortgage may not
closed out of about
exceed $550,440)
400,000 homeowners that
Borrower has experienced
were originally estimated
financial hardship and has
Lender absorbs loss
could be served
total monthly mortgage
resulting from write-down
payments higher than 31% in mortgage value
of gross monthly income
Borrower shares equity in
Mortgage originated on or home with FHA when the
after January 1, 2008, and
home is sold
at least 6 payments have
Borrower pays up-front
been made
and annual mortgage
Borrower does not have a insurance premiums
fraud conviction in the
Second lien-holders
last 10 years, has not
release their liens in
intentionally defaulted, and exchange for an upfront
did not provide false
payment
information to obtain
original mortgage

Fannie Mae and Freddie
Borrower has a loan
Borrower contacts lender Active; began December
Mac Streamlined
owned by Fannie Mae or
to determine eligibility
15, 2008
Modification Plan
Freddie Mac
Mortgages are
No information on
Borrower has missed
systematically modified to completed loan
three or more monthly
achieve 38% mortgage
modifications currently
payments
debt-to-income ratio
available
Home is occupied as
Modification follows the
primary residence
following steps in order as
Mortgage loan-to-value
necessary to achieve 38%
ratio is at least 90%
DTI: (1) capitalize late
payments and accrued
Mortgage originated on or interest; (2) extend loan
before January 1, 2008
term for up to four years
from modification date; (3)
Borrower is not in active
adjust interest rate to no
bankruptcy
lower than 3%; (4)

principal forbearance.
Servicers receive payment
for each modification
completed
Source: Table created by CRS.
Notes: The Federal Reserve announced a foreclosure prevention program on January 27, 2009. Details on this
program will be added as they become available.

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Katie Jones

Analyst in Housing Policy
kmjones@crs.loc.gov, 7-4162

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