Fannie to Aid Underwater Loans

The plan is the latest twist in efforts to contain the surge in foreclosures on homes in much of the U.S. It differs from a bill approved by the House on Thursday that would authorize the Federal Housing Administration to insure loans for distressed borrowers only after the lender has written down the principal -- something many lenders are reluctant to do. Fannie's refinance plan would result in new loans of equivalent size, leaving the borrower underwater but giving him or her a lower monthly payment or at least a fixed rate.

Officials of Fannie, a government-sponsored provider of funding for home loans, said the new program is limited to people who have kept up on their payments so far and whose loans are owned or guaranteed by the company. Normally, it is impossible for underwater borrowers to qualify for refinancing because the collateral isn't worth enough to support new loans that would let them fully pay off the old ones. But Fannie officials say in some cases it can make sense to refinance such people if the new loan will reduce their interest rate or let them lock into a fixed rate rather than risking future upward adjustments.

"We're saying to the consumer, 'You're not trapped any more,'" said Jeff Hayward, a senior vice president at Fannie.

The program will allow refinancing loans of as much as 120% of the property value. Fannie officials project that 150,000 households could qualify for such refinancings.

Rather than reducing the principal due on the loan and taking an immediate loss, Fannie is betting that these people will be able to keep up on their new loans and prices will recover.

The National Association of Home Builders and the National Association of Realtors praised the program, and many politicians have been pushing Fannie and rival Freddie Mac to do more to help borrowers.

The companies want to avoid immediate loan losses that would further erode their meager capital cushions.

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