2nd UPDATE:US Administration Unveils Guidelines For Mtge Modifications

The Obama administration Wednesday unveiled key guidelines for its housing market rescue plan that should enable loan servicers to immediately start modifying eligible mortgages.

Under the new guidelines, modified loans would have to complete a 90 day trial period before any government payments to servicers, borrowers and mortgage holders kick in.

Only mortgages originated on or before Jan. 1, 2009 will qualify for the program, which will accept new borrowers through the end of 2012.

"Two weeks ago, the president laid out a clear path forward to helping up to 9 million families restructure or refinance their mortgages to a payment that is affordable now and into the future," Treasury Secretary Timothy Geithner said Wednesday in a statement. "Today, we are providing servicers with the details they need to begin helping eligible borrowers."

Treasury unveiled the basic outlines of its strategy to right the housing market last month, including a loan modification program it said would help 3-4 million homeowners avoid foreclosure.

On Wednesday, the Treasury confirmed many key features of the program and released technical documents detailing how the loan modifications would work. Meanwhile, the Federal Reserve and other regulatory agencies urged all federally-regulated financial firms that service or hold residential mortgage loans to participate in the loan modification program. They noted, in a joint statement, that financial firms that receive government funds in the future under the administration's bank rescue program will be required to implement loan modification programs that follow the guidelines Treasury announced Wednesday.

The program should promote "sustainable alternatives to foreclosures on owner-occupied residential properties," said the group of agencies, which includes the Federal Deposit Insurance Corp., the National Credit Union Administration, the Office of the Comptroller of the Currency and the Office of Thrift Supervision in addition to the Fed.

"These incentives should help make affordable loan modifications more attractive than foreclosure," they said. "The program also provides incentives for homeowners whose mortgages are modified to remain current on their mortgages after modification."

Under the new guidelines, the government will pay lenders and borrowers generous incentives to participate in the program. Eligible borrowers must be screened for financial hardship and lenders will have to document current income, assets and expenses to verify that borrowers are struggling to meet their mortgage payments.

For borrowers deemed at risk of imminent default, lenders will apply a net present value test to determine whether the loan is worth modifying under the program.

Under the program, lenders will have to reduce monthly payments on mortgages to no greater than 38% of a borrower's income. The government will then match further reductions in monthly payments dollar-for dollar from 38% down to 31% debt-to-income ratio for the borrower.

After five years, "the interest rate can be gradually stepped-up by 1% per year to the conforming loan survey rate in place at the time of the modification," Treasury said in a document released Wednesday.

Treasury said that in order to reach that 31% debt-to-income ratio level, interest payments will first be reduced down to as low as 2%.

In cases where loans fail the net present value test, mortgage insurers have agreed to pay partial claims in order to help the borrower avoid foreclosure, Treasury said.

Under the program, servicers will receive an upfront fee of $1,000 for each eligible modification meeting guidelines established under this initiative. Servicers will also receive "pay for success" fees, as long as the borrower is successful at staying in the program, of $1,000 each year for three years, said Treasury.

In addition, Treasury said the plan will include an incentive payment of $1,500 to mortgage holders and $500 for servicers for modifications made while a borrower at risk of imminent default is still current on their payments. As long as the borrower stays current on his or her payments, he or she can get up to $1,000 each year for five years, the department said.

Treasury added that Freddie Mac will audit compliance for the housing program.

-By Maya Jackson Randall and Jessica Holzer, Dow Jones Newswires; 202-862-9255; [e-mail]