People falling behind on Washington Mutual mortgage payments won a three-month reprieve on Thursday, when WaMu owner JPMorgan Chase said it will modify terms on an estimated $70 billion in loans to 400,000 families over the next two years.

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People falling behind on Washington Mutual mortgage payments won a three-month reprieve Thursday, when WaMu owner JPMorgan Chase said it will modify terms on an estimated $70 billion in loans to 400,000 families over the next two years.

The New York-based bank, which bought WaMu after the Seattle thrift failed last month, will delay foreclosures for 90 days while it rolls out a wide-ranging effort to lower interest rates or postpone principal payments for eligible borrowers.

Congress has been urging financial-services companies to work with borrowers and avoid foreclosures, which last quarter rose to the highest level on record.

Bank of America said in July it would help more than 250,000 at-risk borrowers stay in their homes. JPMorgan previously modified terms on $40 billion in mortgages to 250,000 families, including earlier efforts by WaMu and another lender JPMorgan acquired.

The new program will allow some borrowers to reduce their interest rates, in some cases permanently, and to defer principal payments until people refinance or sell their homes.

Modifications are available on mortgages owned by JPMorgan, including its WaMu loans, and some loans it services that are owned by investors.

For borrowers who have option ARM mortgages — which allow customers to pay so little that their balance could rise instead of fall — JPMorgan will offer modifications to eliminate so-called negative amortization.

JPMorgan said it inherited numerous option ARMs this year when it acquired WaMu and investment bank Bear Stearns. WaMu had $54 billion of option ARMs in its portfolio in the first quarter, according to reports citing Inside Mortgage Finance.

The program is only for owner-occupied properties and borrowers who show a willingness to pay, so customers should continue making mortgage payments to demonstrate their intent, the bank said.

It will contact eligible borrowers to offer modifications. Customers who are concerned they might not be able to make a payment should call the phone number on their mortgage statement, a spokeswoman said.

JPMorgan did not say how much the new program will cost it, and would not disclose how many of its mortgages are from Washington Mutual or in Washington state.

Borrowers should be patient and careful about making mortgage modifications, said Donna Dziak, manager for the housing counseling and prevention program at the nonprofit Solid Ground in Seattle.

“It’s a one-shot deal,” she said. “If you fall behind, they will not work with you again.”

Homeowners should get all their financial documents together, prepare a budget showing how much they can afford to pay each month and be ready for long waits on the phone.

“They should have a fairly concise explanation of why they’re falling behind, even if they have to write a little script,” Dziak said.

Borrowers should be cautious about interest-only payments. JPMorgan said it will offer interest-only payments for 10 years as one way to eliminate negative amortization on option ARMs.

“They should really be careful with anything interest-only, because that’s where a lot of people got upside down on their loans,” Dziak said.

Bert Ely, a bank consultant in Alexandria, Va., said a 10-year interest-only modification might work for people who want to stay in their homes a long time. “The expectation is that long before then, we will have some house-price recovery,” he said.

The entire modification program makes business sense for the bank, Ely said. “In theory, it’s cheaper [for the bank] to modify than to foreclose, although that’s not always the case.”

There could be political reasons as well.

JPMorgan received $25 billion earlier this month as part of a federal bailout package meant to shore up the economy by encouraging banks to start lending again.

The New York Times reported last week that a JPMorgan executive told employees on an internal conference call that he expected the bank to continue tightening credit while using the federal funds to help it buy other banks.

“Politics is playing such a huge role in this process, the banks have to be very cognizant of how they’re perceived,” said Charles Peabody, partner and research analyst at Portales Partners LLC in New York. “What they want to do is show they deserve this good deal from the government by helping out the average man.”

Federal Deposit Insurance Corp. Chairman Sheila Bair has proposed a plan to guarantee mortgages to help stem foreclosures, according to two congressional aides briefed on the matter. Her idea is to use as much as $50 billion of the $700 billion financial-services industry bailout package approved by lawmakers this month.

Bair called the JPMorgan plan a “welcome development” for the $10.6 trillion mortgage market.

“A clear consensus is emerging that broad-based and systematic loan modifications are the best way to maximize the value of mortgages while preserving homeownership,” Bair said. That process will help “stabilize home prices and the broader economy,” she said.

As part of its new program, JPMorgan will establish 24 regional counseling centers to offer face-to-face help in places with a high number of borrowers whose payments are overdue. Officials said they plan to open offices in California and Nevada, but are still deciding where else.

The bank plans to hire 300 more loan counselors, bringing its total to more than 2,500, and create a process to examine each mortgage before it goes into foreclosure to ensure that the borrower was offered appropriate modifications. That process will employ about 150 people.

Keeping 400,000 families from foreclosure over the next couple years would have a major impact.

In September, 265,958 U.S. homeowners were in some stage of the foreclosure process. That represents a 21 percent year-over-year increase, according to RealtyTrac, a California real-estate data firm.

The state foreclosure activity, however, bucked that trend in September with 1,952 homeowners in foreclosure, a 38 percent decline from the previous September.

In King County, 849 homeowners were experiencing foreclosure in September. This equates to one in every 1,630 households — well below the national average of one in every 475 households in foreclosure, RealtyTrac reported.

Seattle Times business reporter Elizabeth Rhodes and Bloomberg News contributed to this article.

Melissa Allison: 206-464-3312 or