New mortgage plans

On Tuesday I posted about how several major mortgage lenders were announcing programs to help troubled borrowers stay in their homes. Later that day, the government unveiled its plan for Fannie Mae and Freddie Mac - the government-controlled companies that own or guarantee 58 percent of all mortgage on single-family homes in the U.S. The plan quickly drew criticism from all corners for its limited scope and modest funding.

Let's take a look at the basic plan, and then address the critiques.

1) In order to participate in the program, the borrower must be at least 90 days late on a mortgage payment and prove hardship. Under these guidelines, the government hopes that the plan can help about 400,000 homeowners.

2) Once accepted into the program, payments will be adjusted through lower interest rates or longer repayment periods. So, for example, a 30-year loan may be extended to 40 years, or interest rates may be lowered to as little as three percent for up to 5 years. The goal is to make a mortgage payment account for about 38 percent of a borrower's monthly household income, which is considered the threshold of affordability.

3) The principal will not be reduced. Unlike other mortgage readjustment plans being unveiled recently, like Citigroup's, a Fannie or Freddie loan's principal may be delayed, but not lowered.

The main criticism of the Fannie-Freddie plan is that it doesn't affect the majority of troubled loans, which are held by private investors. The current plan will only potentially effect about 20 percent of delinquent loans - a piddling number given the current economic quagmire.

FDIC chairman Shelia Bair has put forth an alternative plan that would touch far more loans. On the new plan, Bair said, "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."

In other words, the Fannie-Freddie plan as it stands now treats a few of the symptoms, but not the disease.