Citigroup to Offer Modifications on Underwater Second Mortgages

Citigroup (C) announced Thursday that it would participate in 2MP, a second-mortgage relief program that is part of the Obama administration's $75 billion foreclosure prevention program. Citi follows in the footsteps of JPMorgan Chase (JPM), Wells Fargo (WFC) and Bank of America, (BAC) all of which have already to committed to participate in 2MP.

Under 2MP, Citi can offer loan modifications that reduce payments on second mortgages for homeowners who are struggling to avoid foreclosure on underwater homes.

On paper, it's a win-win-win for homeowners, the banks and the economy. (It typically costs a bank more to foreclose on a house than it does for the lender to lower the mortgage payments.) In practice, however, lenders have proven remarkably reluctant to modify many loans. Based on data released by the Treasury Department in January, only a small percentage of the 4 million to 5 million homeowners the program was designed to help have actually benefited from it. In fact, some riled-up property owners in Seattle have even gone so far as to sue Bank of America for refusing to modify their loans.

In raw numbers, fewer than 200,000 borrowers have secured permanent loan modifications so far. The U.S. Treasury recently said that there were roughly one million active loan modifications, but only 169,000 had been made permanent modifications. And despite the billions of dollars available to the program, the Congressional Budget Office said only $31 million has been spent on loan modifications.

Although politicians have been pushing bank execs to step up their efforts to assist underwater homeowners for quite some time, little progress has been made. Part of the problem is that for many Americans, loan modifications may not be enough to prevent foreclosures, especially in cases where homeowners are struggling to make payments on second mortgages. Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, recently railed about the Home Affordable Modification Program, arguing that there was still a significant risk of re-default for many troubled homeowners who got permanent loan modifications. Barofsky also called for greater transparency, recommending the Treasury disclose goals for how many homeowners the program could realistically help.