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WASHINGTON (Reuters) - Six top mortgage companies on Tuesday launched a program aimed at staving off foreclosure for seriously delinquent borrowers in the hopes that new, more affordable loan terms can be worked out.
"Project Lifeline," backed by the U.S. Treasury and the Department of Housing and Urban Development, would pause foreclosure proceedings for borrowers more than 90 days in arrears while servicers determine whether they could make payments under new terms, the six firms said in a statement.
The effort would cover all types of home loans, including home equity loans and second liens, unlike an earlier plan aimed at freezing interest rates for subprime mortgage holders who cannot afford payments that reset to higher levels.
"These are homeowners on the brink of losing their homes," Treasury Secretary Henry Paulson said. "Every one we save will make a difference. If someone is willing to make a call to reach out, there's a chance we can save their homes."
Democratic lawmakers said the effort did not go far enough to help borrowers stuck with mortgages they cannot afford.
"This plan, while a step in the right direction, will not stem the tide of the millions of foreclosures we are facing in the coming months," said Illinois Sen. Richard Durbin, a member of the Democratic leadership.
The plan unveiled Tuesday is being undertaken by six mortgage lenders that service about 50 percent of U.S. mortgages -- Bank of America, JPMorgan Chase & Co, Citigroup, Countrywide Financial, Washington Mutual and Wells Fargo.
All are members of the Hope Now alliance of lenders, servicers and investors that had agreed to the Treasury-brokered rate-freeze plan in December.
Economists warn that the deep U.S housing slump has pushed the economy to the edge of recession, if not over it. Last year, prices for existing U.S. homes fell for the first time since the Great Depression while sales volume collapsed.
With home values stagnant or falling, a rising number of Americans are finding it difficult to refinance out of mortgages they cannot afford.
An estimated 1.5 million subprime mortgages, which traditionally are targeted at borrowers with spotty credit, will reset to higher rates this year, putting more owners at risk. Another 500,000 reset in 2009.
"In terms of subprime and the resets, the worst isn't over, the worst is just beginning," Paulson said.
Under the new program, lenders will contact delinquent homeowners to offer assistance to modify their loans. Floyd Robinson, the head of consumer real estate at Bank of America, said in some instances his institution would be willing to forgive a portion of the mortgage by refinancing for a smaller loan amount if an owner owes more than the home is worth.
"We will look at each individual circumstance, homeowner to homeowner," he said.
Homeowners who are already in active bankruptcy or face a foreclosure sale in less than 30 days will not qualify for a pause in the foreclosure process, nor will vacant homes and investment properties.
Analysts at Barclays Capital said the program would likely help only a small share of distressed borrowers. "We have reservations as to whether 30 days is long enough to determine if loan modifications will help borrowers currently 90+ days delinquent," they wrote.
William Longbrake, an executive with Washington Mutual, said individual loan servicers could have been making the same efforts all along and that Washington Mutual frequently put a freeze on foreclosure action. "What's different is that this is collective. This is coordinated," he said.
Paulson, who said he was urging all servicers to join the program, defended the effort and said a broad plan for a government fund to buy up distressed mortgages was not needed. Sen. Christopher Dodd, a Connecticut Democrat who chairs the Senate Banking Committee, has proposed such a plan.
"The president made the decision we would focus on (private) programs like this," Paulson said.
Editing by Leslie Adler