James Lockhart, Director and Chairman of the Federal Housing Finance Agency (FHFA), announced a large loan modification plan today.

How big is it? According to Lockhart, tens of thousands of mortgages can be renegotiated. Servicers of these loans have agreed to this plan and will receive $800 for each loan modified by the program. Unfortunately, it appears that the only folks eligible at this point are borrowers who are at least three months delinquent in their mortgage payments, and the loans must be owned or securitized by Fannie Mae or Freddie Mac. The plan is designed to get homeowners into mortgages they can afford. Mortgages may be extended, and Lockhart mentioned a 3% rate for 40 years with a balloon payment on the unadjusted principal that remains at the end of the term. Naturally, many questions remain about actual plan implementation. Lockhart wants to renegotiate mortgages so that borrowers will have no more than 38% debt-to-income ratio.

The Chairman of the Federal Deposit Insurance Corporation (FDIC), Sheila Bair, when asked for her thoughts regarding this plan, called it a, "step in right direction, but falls short in what is needed to address widescale mortgage issues."

Why should mortgages be renegotiated? Why bail out people who made bad decisions? Lockhart answered those questions and stated that foreclosure is extremely expensive for Fannie and Freddie. It often costs them 50% of the loan, and renegotiating should only cost 20%. He went on to say it's good for homeowners in general because it will start to stem price declines in neighborhoods where there are foreclosures. He believes this program will hopefully help in the overall market to stabilize home prices.

While this is only a first step, it is sure to be hotly debated in the days to come. What are your thoughts?