"This new option gives delinquent borrowers another path to avoid
foreclosure," Edward J. DeMarco, acting director of the Federal Housing
Finance Agency, said in a statement announcing the modifications
Wednesday.
The new modifications, however, would not include reducing the loan
balance, a move promoted by housing advocates and others but resisted by
DeMarco, who says it would end up costing taxpayers money and would
encourage defaults.
California Atty. General Kamala Harris ‘ one of a group of nine attorneys general who have called for
DeMarco’s ouster because of his principal-reduction stance ‘ called the
program "a step in the right direction by FHFA." But she added: "More
must be done to allow homeowners to benefit from principal forgiveness
and forbearance."
In most cases, FHFA officials said, borrowers would save more money
by documenting their incomes and expenses. But the new program would cut
down on documentation requirements because many troubled borrowers
never respond when asked to apply for modification programs requiring
financial documentation, or they struggle to provide all the necessary
information.
The FHFA was created to oversee Fannie Mae and Freddie Mac when the government stepped in during the financial crisis to keep the home finance giants from failing.
The modifications would be available to borrowers with Fannie- or
Freddie-backed loans. They must be delinquent by at least 90 days but no
more than 24 months. The loans must be first mortgages, at least 12
months old and amount to 80% or more of the property value. Missed
payments will be added to the new loan balance. Loans that have been
modified two or more times previously are not eligible.
Borrowers would see their payments slashed by an average of about
30%. The modifications would lower the mortgage interest rate to half a
percentage point above the going rate for 30-year fixed loans, or about
4% at present, and stretch repayments over 40 years. Some borrowers also
would not have to pay interest on a portion of the loan.
Fannie and Freddie, controlled by the government since the financial
crisis, own or guarantee more than half of all U.S. home loans. They pay
mortgage customer-service providers to collect payments, handle
foreclosures and work to modify loans for troubled borrowers.
Consumer advocates and housing counselors said the program would help
address some frequently heard complaints about the loan servicers, most
of which are arms of the country’s largest banks.
"We continue to hear numerous and harrowing stories about servicers
losing documents, dual tracking and improperly denying borrowers relief
to which they are entitled," said Kevin Stein, associate director of the
California Reinvestment Coalition in San Francisco. "More automatic
modifications can get around these problems."
Dual tracking is the practice of pursuing a foreclosure at the same
time a borrower is applying for a modification to avoid losing the
house.
Stein and others complained about DeMarco’s refusal to include
principal reduction in the FHFA’s efforts to assist borrowers and reduce
losses at Fannie and Freddie by avoiding foreclosures.
"Offering a 40-year loan at today’s interest rate without a lot of
hassle will certainly help," said Glenn Hayes, chief executive of
Neighborhood Housing Services of Orange County. "It would be much better
if they’d just bite the bullet and do a write-down" of the amount owed.
"These people are never going to pay off a 40-year loan anyway."
Fannie and Freddie will require servicers to send letters to eligible
borrowers explaining the modification and specifying the reduced
payment. After receiving three on-time payments, the servicers are to
send a formal modification agreement, which when signed and returned
will make the modification permanent.
FHFA officials said they did not believe the changes would trigger
large numbers of strategic defaults, in which borrowers who can afford
to pay fall behind intentionally to get their loans modified. Fannie Mae
and Freddie Mac have existing screening measures to prevent strategic
defaulters from taking advantage of the program, the FHFA said.
UC Irvine law professor Katherine M. Porter ‘ appointed by Harris to
monitor whether banks are complying with the terms of a $25-billion
national settlement of abuse claims ‘ praised the program for shifting
the burden for loan modifications from families to the servicers.
"One of the real problems in dealing with borrowers has been
procedures ‘ delivering relief, the communications, the lost documents,"
Porter said.
"This initiative appears to create an easier process, particularly
for people who have difficulty in communicating with servicers because
they work odd shifts, have a language barrier, have trouble collecting
documentation."