Relief Starts to Trickle to Troubled Homeowners

It won't solve the housing bust, but some beleaguered homeowners will finally be eligible for a tiny slice of the government's huge bailout fund.

After weeks of prodding, the honchos heading up the $700 billion financial rescue plan for banks have finally offered to help some of their most desperate customers. Starting December 15, Fannie Mae and Freddie Mac, the huge, government-controlled mortgage underwriters, will sponsor various kinds of relief to homeowners at risk of foreclosure. Here are some of the requirements eligible borrowers must meet:

• Be at least three months behind on their mortgage payments
• Owe the bank at least 90 percent of what the home is worth
• Live in the home as a primary residence
• Not be in bankruptcy
• Be able to prove that they're not just trying to skip out on the loan

Since Fannie and Freddie hold nearly 60 percent of all U.S. mortgages, the new effort to modify problem mortgages should have more teeth than "voluntary" programs that have reached few borrowers. As an added incentive, the feds will pay banks an $800 fee for every loan they rework. That means struggling borrowers who might have approached their bank before—and found the door to a workout closed—could get a second chance.

For those who qualify, banks could agree to lower the interest rate or extend the life of the loan in order to lower monthly payments and make the mortgage more affordable. But many troubled borrowers will still fall outside the new safety net, for a variety of reasons. Here's who is most likely to benefit:

Homeowners with decent income. A new federal standard calls for the typical monthly mortgage payment to be no more than 38 percent of household income. Which means you have to have some income to start with. At IndyMac, the California bank the FDIC took over this summer, an aggressive loan workout program has helped some struggling borrowers lower their monthly payment by an average of about $380. That might make a difference for working families just starting to slip under water or borrowers who could afford the payments under a low, introductory rate but are now struggling under a much higher reset rate. But it probably won't help people who have been laid off or whose income has fallen significantly. And so far, the feds are being careful not to forgive portions of a loan outright.

Borrowers who badger their bank. Government regulators say that one of the barriers to helping some of the most troubled homeowners is finding them—mainly because they don't seek help where it's available. So people who think they might qualify for a mortgage modification shouldn't wait for their bank to contact them: They should beat a path to the bank and demand help. And if it's not forthcoming right away, ask again.

It's true that some banks have been stingy with struggling customers. But on their own, big lenders like Citibank and Wells Fargo have recently announced new plans to try to help homeowners, and the feds now hope that the Fannie and Freddie workouts will set a model that other lenders will follow. So it can't hurt to ask for help more than once. A couple of places to start: The government's Hope Now program, and the Department of Housing and Urban Development's foreclosure prevention website.

People with their paperwork in order. One of the reasons it's taken so long to get a program in place to help homeowners is the potential for fraud and abuse. Regulators are trying to be careful that flippers, speculators, and people who can pay their mortgage but just want to wriggle out of their loans don't game the system. So anybody who shows up asking for a workout is likely to undergo a white-glove inspection. You'll have to prove that you work and live where you say you do, you're not juggling a portfolio of properties, and you're really in financial distress. The days of undocumented "no-doc" loans are long gone.

Borrowers with a loan held by the issuing bank. Unfortunately, this cuts out a lot of homeowners—and there's practically nothing they can do about it. Over recent years, the majority of mortgages have not been held by the bank that made the initial loan. Instead, they've been transmogrified into complex securities and sold to investors all over the world—a big contributor to the overall housing bust.

Fannie and Freddie now hold more than half of those mortgages, which means they're in a position to modify those loans. But the majority of the problem loans are held by private servicers under no obligation—yet—to do anything to help borrowers. The issuing bank can quickly tell a borrower who holds their loan. And even if it's some far-flung investor, there may still be hope of a workout eventually: Regulators hope the Fannie and Freddie modifications are copied by the rest of the industry, and they're also seeking ways to force private servicers to get more involved. Again: Keep asking. Sometimes, the government helps the little guy, too.