Citigroup Halts Foreclosures as Govt. Unveils Latest Plan to Help Homeowners

Citigroup announced that it would halt all foreclosure activities as it attempts to contact nearly 500,000 homeowners to rework their loans.

The plan could lead the bank to renegotiate more than $20 billion in mortgages. The move comes at the same time that the federal government announced new plans to help homeowners by reworking federally guaranteed loans.

Citigroup's announcement will increase the banks efforts to work with homeowners. According to the bank, they have already modified or worked out payment plans for 120,000 customers. Their new plan is designed to help more homeowners stay out of foreclosure, but it will not work for everyone.

To qualify for a workout with the bank, homeowners must actually live in their home and have sufficient income to afford any reduced payments that are negotiated. In addition to this, homeowners have to actively be attempting to work out a payment plan with the bank. This means that the homeowners who are contacted by the bank, either by phone or by mail, need to be responsive. Surprisingly, this has been a significant issue for all banks that have been trying work with borrowers. Many borrowers who get behind automatically assume that when their bank contacts them it is simply for collection purposes. Because of this they avoid calls and don't open mail.
 
The banks plan only affects loans owned by the bank. This means that many loans serviced by the bank will not qualify for a workout.
 
In addition to the Citigroup announcement, the federal government unveiled its new plan to help homeowners. The government will work with FannieMae, FreddieMac and lenders to modify mortgages so that homeowners' monthly payments don't exceed 38% of their monthly income.
 
Under the plan, lenders may defer the amount of principle owed on a loan, reduce interest rates and extend loan terms to as much as 40 years. Homeowners will eventually have to pay the entire principle amount owed but under the restructuring plan, they may be able to defer these payments long enough to make the monthly payments affordable.
 
Unfortunately, the governments plan does have some ridiculous restrictions associated with it. To qualify, homeowners must have less than 10% equity in their homes. Additionally, they must be at least 90 days past due on their payments. This means that only the most cash-strapped borrowers will qualify and only after they have ruined their credit.
 
Homeowners who accept help under the government plan should do some investigation first. Because principle payments may be deferred, homeowners could actually find themselves owing a lot more money to the bank than they thought they would once their home is sold.  And because the plan doesn't force banks to reduce the principle amount owed, many homeowners who qualify are likely to find themselves making payments for a house that it worth less than they actually owe. In these cases, the homeowner may actually be better off losing their home to foreclosure than they will be if they modify their loans.
 
By Guest Blogger: Jim Malmberg