The programme was created to "reduce preventable foreclosures with a simplified, streamlined loan modification programme to get struggling homeowners into mortgages they can afford," according to FHFA director James Lockhart.
The plan is designed to provide assistance to homeowners who are more than 90 days overdue on their mortgage payments. Under the scheme, the payments required on mortgages will be reduced to 38% of their annual household income by lowering the mortgage interest rate, extending the term of the loan, or by allowing homeowners to defer payment on part of the principal.
Borrowers who enter into the programme will have a 90-day period to demonstrate they can make payments under the scheme before the loan modification is confirmed.
To encourage participation, the plan will offer mortgage servicers a fixed payment of $800 for each loan modified under the programme.
Several banks have also initiated efforts to ease the terms of mortgages for distressed borrowers.
Citigroup announced plans to reach out to 500,000 of its distressed borrowers via its Citi Homeowner Assistance program. The plan focuses on homeowners who reside in areas with high declines in real estate valuations and elevated unemployment levels. The programme will allow borrowers to reduce their monthly balances temporarily and slash interest rates on loans for up to four years.
On October 31, JP Morgan announced a programme that would assist 400,000 distressed borrowers by providing rate reductions, extending loan terms, or by providing consumers with different products.