Citigroup has launched a new, and far more serious effort, to help struggling borrowers save their homes.

It will stop foreclosing on customers who are behind on their payments and offer them more affordable terms that require them to pay no more than 38% of their pretax income each month.

By mid-2009, Citi expects to have contacted 500,000 additional homeowners who are considered default risks and will try to modify their mortgages before they start missing payments.

The program seems to be part of a growing realization, even within the banking industry, that more must be done to reduce the record number of foreclosures sweeping the country.

The foreclosure prevention programs, such as HOPE NOW, that the Bush administration negotiated with lenders have been a big disappointment and haven't done nearly enough to slow the number of families losing their homes.

Citi's Homeowner Assistance program will lower monthly payments by:

Reducing the interest rate. Although it has not determined a range for the rates it will offer, Citi plans to move customers with adjustable-rate mortgages into fixed-rate loans.

In most cases, the rate changes will be permanent, says Citi spokesman Mark Rodgers. However, customers with temporary problems -- such as a divorce or severe illness -- may qualify for a lower temporary rate.

"In some instances, we may reduce the rate to as low as 1% for two years to allow them to recover from a financial shock," Rodgers says.

Extending the loan. Adding 10 or 20 years onto the mortgage will give borrowers more time to repay their debt and let them repay the balance in smaller chunks.

Forgiving some of the principal. Decisions to write off debt will be made on a case-by-case basis, Rodgers says. But if that's what it takes to reduce payments to an affordable level, then it will be done.

A willingness to reduce debt is critical, because it's one of the best ways to permanently lower monthly payments.

Many borrowers have also seen their property values decline so much over the past couple of years that they owe tens of thousands of dollars more than their homes are worth.

That's especially true for buyers who never had any equity in their homes because they financed the entire purchase price.

If lenders won't reduce the principal and give homeowners a chance to build at least a little equity, they'll question the wisdom of repaying the debt, no matter how low the payments might be.

Customers must be willing to work with Citi, Rodgers says. That includes returning calls, providing all of the information the bank requests and accepting the best deal Citi can provide.

The program will target areas experiencing financial and economic distress, including Arizona, California, Florida, Michigan, Indiana, Ohio and Nevada.

The biggest catch is that Citi can only do this for loans it fully owns.

Citi also manages hundreds of thousands of loans that are owned by other banks and investors such as hedge funds, a type of unregulated mutual fund.

So just because you write your monthly check to Citibank doesn't automatically qualify you for this program.

If you don't hear from the bank, you can call the customer service number on your monthly statement or Citi's general number, 1-800-667-8424 (1-800-MORTGAGE) to find out if you're eligible.

By Erin Brereton

Interest.com Contributing Editor