Last Tuesday, a government plan was introduced to try and help modify distressed loans, thus preventing mass streams of foreclosures. With the plan, homeowners who have loans owned/backed by mortgage finance companies, and that are 90 days or more behind on their payments, could qualify for lower interest rates or longer repayment terms, at 38% or less then their monthly household income. Also, while payment on the loan principal wont be reduced, it could be deferred. In regards to the interest rates, it could be lowered to 3% for 5 years, before increasing 1 percentage point per year, before hitting the market rate or original interest rate. One big difference with this plan is that servicer participation is not voluntary. The government is hoping that their program can help around 400,000 homeowners.

However, there are some significant snags in the plan. One such snag is that it doesn´t apply to subprime loans, distressed loans held by private investors. Of course the government is hoping that servicers viewing the plan who control such loans, would follow the trend. Hoping at this moment does nothing for the situation. What Fannie and Freddie own/guarantee (58% of mortgages with single-family homes), is only 20% of the serious problematic loans hitting the market. Most of the others were grouped into securities and sold to investors. The senior VP for The Center for Responsible Lending, Eric Stein, remarked that "Most foreclosures are happening on subprime loans that Fannie and Freddie don't control,...More is still needed to address foreclosures on these mortgages. To date, voluntary modifications haven't been sufficient. That's why we still have a foreclosure crisis."

Federal Deposit Insurance Copr, chairman Sheila Bair, spoke about the government plan and the problems not addressed saying, "This is a step in the right direction but falls short of what is needed to achieve widescale modifications of distressed mortgages, particularly those held in private securitization trusts,...As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans." Most investors have held back on modifying their loan terms, not helping the many homeowners struggling to retain their homes and repay the loan. Bair wants to use up to $50 billion of the $700 billion marked to try and boost the market, to guarantee modified loans, which would be an incentive for servicers to adjust loan terms, thus helping around 3 million more homeowners.

Many still hope that Fannie and Freddie´s actions and weight on the market will influence servicers that work with private investors to follow suit and use modifications. James Lockhart, the head of the FHFA (the overseer of Fannie and Freddie) said that "I ask the private label mortgage-backed securities servicers and investors to rapidly adopt this program as the industry standard,...Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values."