Citi To Perform Loan Modifications On $20 Billion In Mortgages

Citi and Big Mortgage Loan Modifications

In an aggressive move, targeting the root cause of the global financial crisis, Citigroup Inc. has announced November 10th, 2008 that it is offering to modify the loans of as much as $20 billion in mortgages. Citigroup's program includes subprime borrowers and those with good credit. This is a sign that the bank sees mortgage delinquencies and foreclosures need immediate attention.

"The real problem in the U.S. now is increasing unemployment," said CitiMortgage Chief Executive Sanjiv Das. "We are finding that people across the board need help." The help will come as a loan modification. But for the majority of homeowners to be helped, CitiGroup's investors must be cooperative. CitiMortgage owns 1.5 million mortgages totaling $175 billion, and services another five million loans totaling $600 billion for investors. It is currently in discussions with investors, about applying the new loan modification program to loans that the company services, but doesn't own.

Some 4.6 %( 69,000) of the mortgages owned by Citigroup were at least 90 days past due at the end of the third quarter of 2008. To save costs, CitiMortgage is halting foreclosures on about 16,000 borrowers who are behind on their loan payments. These borrowers are working with the company on a loan modification solution. About 10,000 of those borrowers live in their homes, and are likely to get their mortgage terms reworked; while about 6,000 are investors.

The company ultimately expects to reach 33% (500,000) customers whose mortgages it owns. Roughly 130,000 of those borrowers are likely to get some kind of loan modification, most likely a reduction in their monthly loan payments. CitiMortgage is calling borrowers primarily in parts of the U.S., where the economy is weak, to offer loan modifications, if they are facing financial difficulty. While the bank's program is nationwide, it will focus on areas in six states -- Arizona, California, Florida, Indiana, Michigan and Ohio -- where unemployment rates are higher than the national average, and home prices are falling sharply.

Borrowers who ask for help can get a loan modification, if their mortgage-related payments exceed 40% of their income. Modifications include lowering the interest rate, extending the term of the loan, and as a last resort, reducing the amount of the debt. CitiMortgage has been testing the program for about three months, with loan payments being reduced on the average of about 40%. It plans to reach out to all mortgage holders in the targeted areas, rather than wait to be contacted. Struggling homeowners don't know what to do, and are reluctant to contact their mortgage company, for fear that their credit score will drop. But CitiMortgage said that if a loan is modified, before it becomes delinquent, it will be counted as current, and won't affect the borrower's credit rating.

But banks efforts are fraught with complications. Banks want to make sure that loan-modification programs don't encourage borrowers, who can afford to pay their mortgages, to default just to get better terms. The actions taken so far by Citigroup and other institutions are limited to loans that they own. It is much more difficult to restructure, mortgages bundled and packaged into securities that now are owned by investors, who often have divergent interests. And to aggravate the situation, these types of mortgages account for the majority of those that were issued in the recent years.

Many other banks including: J.P. Morgan Chase & Co., Wamu, Bank of America, Countrywide, IndyMac Bancorp, Wells Fargo and Wachovia are moving forward with loan modifications. However, "The foreclosure crisis is now much too large to be sufficiently addressed by mortgage servicers and owners. The federal government will need to come forward with a very large and comprehensive foreclosure-mitigation plan." said Mark Zandi, chief economist of Moody's Economy.com. Nationwide, 8.5 million homeowners are expected to default on their mortgages between 2008 and 2010, with some 5.2 million of them expected to lose their homes- Zandi projected.

Written by Katherine M