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Feds to modify mortgages held by Fannie and Freddie

WASHINGTON — The Bush administration will announce plans this afternoon to modify hundreds of thousands of distressed mortgages held or backed by mortgage finance giants Fannie Mae and Freddie Mac.

The Treasury Department, the Federal Housing Finance Agency and other federal regulators have scheduled a 2 p.m. EST news conference to unveil the effort, which they're calling a streamlining of modification procedures for delinquent loans.

The move follows similar announcements by private lenders including Bank of America, J.P. Morgan Chase and most recently Citigroup that they were moving voluntarily to rework home loans that they'd underwritten and held.

Although details were sketchy at midday, the effort could most benefit states such as California and Florida, which saw unprecedented run-ups in home prices and now are suffering a massive decline in home values.

The announcement involves loans held or backed by Fannie and Freddie, which until September were private companies with congressional charters. Together they own or back more than half of U.S. mortgage debt. The Treasury took them over after investors demanded explicit guarantees of government backing for the mortgage bonds the two had issued, called mortgage-backed securities.

The government takeover has been anything but smooth, however, and Fannie Mae on Monday reported a whopping $29 billion loss for the three-month period that ended Sept. 30. Fannie leaders have warned that the current level of government support may not be enough to sustain its new mission of jump-starting the moribund mortgage market.

The Bush administration to date has taken a voluntary approach on mortgage modifications, creating a program called Hope Now in which leading banks and financial institutions pledged to do all in their power to rework distressed mortgages.

That's been a very slow effort, however, which led Republican presidential candidate John McCain last month to criticize the Bush administration and call for massive and aggressive reworking of mortgages that are under water, meaning that homeowners owe more than their houses are worth because of sinking home values.

"Everything to date has been voluntary, and it really hasn't worked and hasn't been enough," said Evan Fuget, senior policy counsel for the Center for Responsible Lending in Durham, N.C. "We think more needs to be done."

One reason that mortgage modifications have moved so slowly is that more than two-thirds of U.S. mortgages were sold into a secondary market, where they were pooled together and sold to investors as mortgage bonds.

The process is called securitization, and loans that have been securitized are difficult to rework because they're often bundled with as many as 5,000 other home mortgages. Investors in these mortgage bonds must sign off, through a trustee, on modifications.

A legal battle already is brewing, as lawyers for investors are challenging forced modifications, which save the homeowners but soak the investors.

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