Fannie Mae Regulator Sets No-Doc Modifications for Borrowers

Seriously delinquent borrowers with mortgages owned or backed by Fannie Mae and Freddie Mac will be able to reduce monthly payments without documenting finances under a program introduced by the companies’ regulator.

The move announced today by the Federal Housing Finance Agency is designed to stem losses to the U.S.-owned firms by letting borrowers at least 90 days behind on their loans bypass the administrative hurdles of typical loan modifications. Homeowners may still give their lender documents on financial hardships and can save more money by doing so, the agency said.

“This new option gives delinquent borrowers another path to avoid foreclosure,” Edward J. DeMarco, the FHFA’s acting director, said in a statement.

About two-thirds of U.S. home mortgages are backed by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, which package loans into securities on which they guarantee payments of principal and interest. About 3.2 percent of mortgages they guarantee were at least 90 days in arrears in January, according to data from the two companies.

Borrowers and lenders have complained about the amount of paperwork required to ease loan terms under the Home Affordable Modification Program. The new effort is designed to ensure that borrowers will get some relief while waiting to hear whether they qualify for deeper aid under the existing HAMP program.

‘Unnecessary Friction’

“If this gets people into a modification and they perform, everybody wins,” Julia Gordon, director for housing finance and policy at the Center for American Progress, said in a telephone interview. “No-doc gets results, and in my view, HAMP should have required far less of this documentation to begin with. There’s been unnecessary friction.”

The Streamlined Modification Initiative will begin July 1 and end on August 1, 2015, the FHFA said. Borrowers must be at least 90 days delinquent, have a loan at least a year old and have less than 20 percent equity in their home to qualify.

Modified loans will have fixed interest rates and payment terms extended to 40 years, the FHFA said. Some borrowers who owe more than their homes are worth won’t be required to pay interest on a portion of the principal.

Fannie Mae and Freddie Mac have been operating under U.S. conservatorship since September 2008, when they were seized by federal regulators amid losses on risky loans during the subprime mortgage crisis.

Since 2008, they’ve completed 1.3 million loan modifications and 1.4 million other foreclosure-prevention actions, including short sales and forbearance plans.

Strategic Defaults

The two companies have computer programs that can detect borrowers who are likely to try to default intentionally to get a streamlined modification, the FHFA said. Whether that will be enough to prevent so-called strategic defaults by borrowers looking to qualify for help remains to be seen, Jaret Seiberg, a senior policy analyst for Guggenheim Securities LLC’s Washington Research Group, wrote in a market commentary.

“We are cautious about whether these safeguards will work, but take it as an encouraging sign that FHFA has thought about the issue and has a plan to address this risk,” Seiberg wrote.