Fannie and Freddie Outline New Respite for Troubled Borrowers

  • Delinquent homeowners could see payments cut by 20 percent
  • Plan is similar to proposal submitted by mortgage trade group

Distressed mortgage borrowers will get a new lifeline from Fannie Mae and Freddie Mac after a critical foreclosure-prevention program expires this month.

The mortgage-finance giants on Wednesday outlined a plan to replace the Home Affordable Modification Program, one of the first responses to the financial crisis by President Barack Obama’s administration.

The new program aims to cut troubled borrowers’ mortgage payments by 20 percent, through a combination of tools such as interest-rate reductions, extensions of loan terms and mortgage principal forbearance. The program, called “Flex Modification,” begins in October 2017.

Fannie Mae and Freddie Mac, which are regulated by the Federal Housing Finance Agency, don’t make loans. They buy them from lenders, wrap them into securities and make guarantees to investors in case of default. Their role in guaranteeing the repayment of mortgages gives them ultimate authority in setting the terms for modifications of borrowers’ loans.

Uniform Help

“By avoiding the high costs associated with foreclosures, the Flex Modification will result in significant savings for the enterprises and taxpayers,” FHFA Deputy Director Sandra Thompson said in a statement. “It will provide borrowers who face permanent hardships with a sustainable modification.”

The program closes another chapter on HAMP, which launched in 2009 and struggled in its early days to meet the ambitious goals of the Obama administration to help as many as 4 million borrowers avoid foreclosure.

HAMP tried to lower delinquent borrowers’ mortgage payments through a combination of moves such as interest rate reductions or extended loan terms. Some mortgage servicers didn’t have the processes to cope with thousands of applications for the assistance, meaning borrowers couldn’t get help quickly. Still over time, the program forged a relatively uniform way for dealing with delinquent borrowers, which didn’t exist prior to the crisis.

Early on, policy makers also struggled to balance the desire to help homeowners with fears that borrowers could purposely default to take advantage of the relief at the expense of taxpayers. Now, some mortgage investors and backers, such as Fannie and Freddie, believe that certain kinds of relief actually save money, since the process of pulling a home through foreclosure can be costly.

Declining Delinquencies

Rising home prices and falling unemployment rates have ended the foreclosure crisis in most parts of the country. In the third quarter, only about 3 percent of mortgages were 90 days or more delinquent, according to the Urban Institute’s Housing Finance Policy Center, down from nearly 10 percent in 2010.

Fannie and Freddie’s new program, which is similar to a September proposal from the Mortgage Bankers Association, will let borrowers get a streamlined modification with no required documentation after being 90 days late on payments. When the MBA made its proposal, lenders said such a move would ensure borrowers get help quickly, which they say is key to avoiding foreclosure.

Fannie and Freddie said a high percentage of borrowers who are at least 60 days late would be eligible.

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