The plan, called Project Lifeline, will be announced Tuesday by the Treasury Department and the Department of Housing and Urban Development, said a person familiar with the plan who confirmed earlier news reports about the plan but spoke on condition of anonymity because it had not yet been made public.

Against a backdrop of surging defaults and administration officials’ prodding of the mortgage industry, the plan will allow seriously overdue homeowners to suspend foreclosures for 30 days while lenders try to work out more affordable loan terms.

On a pilot basis, the plan will involve six of the largest mortgage lenders, in hopes that more lenders will sign on. The participants are Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., JPMorgan Chase & Co., Washington Mutual Inc. and Wells Fargo & Co.

All six are involved in Hope Now, an effort the Bush administration brokered with the mortgage industry late last year to freeze rates on some high-cost subprime mortgages for five years to aid borrowers whose teaser rates are jumping sharply higher. Since then, Treasury Secretary Henry Paulson has urged lenders to expand that effort to cover struggling homeowners with conventional mortgages.

The new plan applies to seriously delinquent homeowners, those whose mortgages are 90 days or more past due.

With home prices falling, even some people with good credit have gotten behind on their payments. Like many subprime borrowers, they signed up for adjustable-rate mortgages that allowed them to make smaller, steady payments for several years until a higher fluctuating interest rate kicked in.

Some borrowed against their rising equity as home prices climbed, assuming they would be able to refinance or sell their homes before the higher payments began. But as prices have plummeted, many homeowners now owe more than their home is worth, and banks have tightened their lending practices, leaving even people with stellar credit struggling with higher payments.

The Hope Now alliance, which includes lenders, investors and nonprofit groups, said last week that it helped nearly 8 percent of subprime borrowers in the second half of 2007 - more than its original estimate.

The group said it helped 545,000 subprime borrowers with spotty credit in the second half of last year, compared with its January estimate of 370,000. That works out to 7.7 percent of 7.1 million subprime loans outstanding as of September.

Among the subprime borrowers aided, 150,000 were helped through permanent-loan modifications, such as lower interest rates, while 395,000 negotiated repayment plans, which often involve a borrower getting back on track even after missing a few payments.

Consumer groups, however, point out that many borrowers still can’t keep up, even after loan workouts. They say many of the borrowers in the Hope Now effort have negotiated short-term loan modifications or repayment plans, which often involve a borrower getting back on track after missing a few payments. A full-fledged refinancing at a lower rate is preferable, they say.

CONFORMING UP: Congressional leaders and the White House have agreed to raise loan limits on mortgages guaranteed by Fannie Mae and Freddie Mac. They have agreed to raise loan limits on mortgages insured by the Federal Housing Administration.

Housing Wire rounds up some details on their Web site.

I’m skeptical that these changes will help. My skepticism comes in three parts:

# By increasing the conforming loan limit (to up to $725,000 in high-cost areas such as California) for loans guaranteed by Fannie and Freddie, the government is allowing — no, encouraging — those companies to take greater risks at a time when the smart money is shying away from risky debt.
Nemo, a commenter on the Calculated Risk blog, put it best with this succinct tidbit: “I guess Fannie and Freddie weren’t too big to fail yet.”

Right now, the conforming limit is $417,000. In most of the country, that limit is ample to assure that mortgage money is available for lower- and moderate-income borrowers. In expensive areas in the Northeast, parts of Florida, and in much of California, it’s hard to find a habitable house for less than half a million dollars, and many homebuyers need mortgages of more than $417,000. They get jumbo mortgages.

For a long time, the typical rate on a 30-year, fixed-rate jumbo mortgage was about a quarter of a percentage point higher than that on a conforming loan. If a lender was offering conforming loans at 6.5 percent, a jumbo borrower could expect to get a loan at 6.75 percent, give or take.

But in August, there was a meltdown in the jumbo securitization market, as investors suddenly realized that they didn’t know how to assess the risks of the jumbo loans that they owned. In a matter of hours, everyone got scared of buying securities based on jumbo loans, and the market halted. Interest rates on jumbo loans skyrocketed. In this week’s Bankrate.com survey, the average rate on a conforming mortgage was 5.57 percent, and the average jumbo was 6.85 percent. In the old days, that jumbo rate would have been about a full percentage point lower.

Now political leaders are saying that Fannie and Freddie should guarantee some of those loans that private investors are afraid of. Fannie and Freddie are private corporations, but they are also government-sponsored enterprises, or GSEs, and a lot of investors believe that there’s an implicit guarantee that the federal government will bail them out.

What if you believed that the government would refund your money from an investment gone bad? Would you act less carefully? Of course you would.

In September, Fed Chairman Ben Bernanke testified before the House Financial Services Committee about mortgage lending. He said:

“Some have suggested that the GSEs could help restore functioning in the secondary markets for non-conforming mortgages (specifically jumbo mortgages, those with principal value greater than $417,000) if the conforming-loan limits were raised. However, in my view, the reason that GSE securitizations are well-accepted in the secondary market is because they come with GSE-provided guarantees of financial performance, which market participants appear to treat as backed by the full faith and credit of the U.S. government, even though this federal guarantee does not exist. Evidently, market participants believe that, in the event of the failure of a GSE, the government would have no alternative but to come to the rescue. The perception, however inaccurate, that the GSEs are fully government-backed implies that investors have few incentives in their role as counterparties or creditors to act to constrain GSE risk-taking. Raising the conforming-loan limit would expand this implied guarantee to another portion of the mortgage market, reducing market discipline further. If, despite these considerations, the Congress were inclined to move in this direction, it should assess whether such action could be taken in a way that is both explicitly temporary and able to be implemented sufficiently promptly to serve its intended purpose. Any benefits that might conceivably accrue to this action would likely be lost if implementation were significantly delayed, as private securitization activity would likely be inhibited in the interim.”

Congress didn’t totally ignore Bernanke. The politicians say that these increased loan limits are temporary, and they want to act swiftly.

Here’s the second reason that I’m skeptical that raising the loan limits will help:

# To get a conforming or FHA-insured loan, you have to document your income and assets.
Herb Greenberg, of Marketwatch, nails it here, pointing out: “Without stated income for wage earners, it’s tough to qualify for a $700,000 loan.”

Even in California.

Greenberg asserts that 70 percent of all jumbos from 2005 to 2007 were stated-income, and for good reason: Most of those borrowers lied about their incomes so they could qualify. Greenberg says 90 percent lied. In the subset of stated-income borrowers who were wage-earners and not small-business owners, he’s probably not far off.

# The third reason for my skepticism can be summed up with this quote from Greenberg: “Refis will still have trouble due to values dropping in jumbo areas by such a large amount. These are the ones that really need the help.”
Bingo.

Even if Fannie and Freddie and the FHA can guarantee or insure loans of upwards of $700,000, it won’t do you any good if you owe more than the house is worth. If you owe $600,000 on an ARM, and the house is now worth $500,000, no one is going to give you a $600,000 fixed-rate loan.

Once again, capital is getting more consideration than consumers. Banks are free to underwrite bigger mortgages, but they’re not being pressured to forgive debt that they should never have underwritten in the first place.

The fastest and cleanest way to get out of this housing and mortgage mess is to make lenders forgive debt on loans for houses that have lost a lot of value. Home prices in much of the country went unsustainably high during the bubble. Those prices need to fall in relation to incomes. Either prices will stagnate for a decade or more while median incomes rise, or prices will fall. By raising the conforming limits, Congress is encouraging prices to stagnate. That surely doesn’t do first-time homebuyers any favors. They’ll have to remain on the sidelines for a few more years. It doesn’t really help current homeowners much, either.

Mortgage Matters is a blog on housing and mortgage issues written by Senior Reporter Holden Lewis.

– Posted: Jan. 25, 2008

WASHINGTON (AP) - The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, cut a key interest rate by three-quarters of a percentage point on Tuesday, the biggest one-day move by the central bank in recent memory.

The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.

The Fed action was the most dramatic signal it can send that it is concerned about a potential recession in the United States. It marked the biggest one-day move by the central bank in recent memory.

The Fed decision was taken during an emergency telephone conference with Fed officials on Monday night. Those discussions occurred after global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world’s largest economy, could be headed into a recession.

In a brief statement, the Fed said it had decided to cut the federal funds rate “in view of a weakening of the economic outlook and increasing downside risks to growth.”