Stocks Drop After New Loan Aid Plan

Economic worries kept the market under pressure, despite new efforts by the U.S. government to help prevent foreclosures

By Ben Steverman

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Stocks finished lower Tuesday in a rocky session after U.S. government agencies unveiled a major streamlined plan to modify mortgage terms for borrowers at risk of falling behind on payments. Economic worries kept the market under pressure, as investors weighed a fresh batch of mostly weak corporate earnings reports and outlooks against the government's efforts to speed up the process for renegotiating delinquent loans held by Fannie Mae (FNM) and Freddie Mac (FRE).

This morning, there was more news from the troubled financial sector, including Citigroup's (C) plan to halt certain home foreclosures, and American Express' (AXP) decision to become a bank holding company.

Also, earnings from Starbucks (SBUX) highlighted the weakened state of U.S. consumer spending, while a 41% drop in revenue at Toll Brothers (TOL) reminded investors of the poor state of the housing market.

On Tuesday, the Dow Jones industrial average finished the session down 176.58 points, or 1.99%, to 8,693.96, after swinging in a 300-point trading range. The broader S&P 500 index lost 20.26 points, or 2.20%, to 898.95. The tech-heavy Nasdaq composite index was down 35.84 points, or 2.22%, to 1,580.90.

Energy, consumer discretionary, industrial, and materials stocks were lower.

December NYMEX crude oil fell $3.26 to $59.15 a barrel. Recession fears have kept prices under pressure, as demand is expected to slide further into the end of the year and the start of 2009, says Action Economics.

The U.S. bond market was closed Tuesday for the Veteran's Day holiday.

The U.S. government, along with Fannie Mae and Freddie Mac, announced plans Tuesday at 2 pm ET to speed up the modification of hundreds of thousands of loans held by the housing finance giants in hopes of trying to prevent more foreclosures. AP reports that the Federal Housing Finance Agency, which seized control of the two mortgage finance companies in September, announced the plan along with other government and industry officials, including Hope Now, an alliance of mortgage companies organized by the Bush administration last year. The plan could have importance because Fannie Mae and Freddie Mac own or guarantee nearly 31 million U.S. mortgages, or nearly six of every 10 outstanding.

Still, government officials did not have an estimate of how many people would qualify for the new program. Officials hope the new plan, which goes into effect Dec. 15., will become a model for loan servicing companies, which collect mortgage companies and distribute them to investors. These companies have been roundly criticized for being slow to respond to a surge in defaults.

To qualify, borrowers would have to be at least three months behind on their home loans, and would need to owe 90% or more than the home is currently worth. Investors who do not occupy their homes would be excluded, as would borrowers who have filed for bankruptcy. Borrowers would get help in several ways: The interest rate would be reduced so that borrowers would not pay more than 38 percent of their income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free.

In other news, the Federal Reserve approved American Express' application to be licensed as a bank holding company. As a bank, Amex would be regulated by the Fed, could rely on funding from deposits and may be more likely to qualify for part of the federal government's $700 billion bailout plan. Amex executives said the move provides the firm with maximum flexibility and stability in a challenging economic environment.

Following the lead of rival banks, Citigroup plans to modify about $20 billion in mortgages by reaching out to 500,000 homeowners who may be at risk of falling behind on mortgage payments. Citi says it has helped about 375,000 people with $35 billion in mortgages avoid foreclosure since 2007.