For seriously delinquent, underwater homeowners struggling through the murky aftermath of the financial crisis, help is on the way in the form of a gift from the Federal Housing Finance Agency (FHFA).
According to an announcement from the FHFA, Fannie Mae and Freddie Mac will soon be required to offer principal reduction to certain seriously delinquent, underwater borrowers that are grappling with the after effects of the crisis.
The new offering, or the Principal Reduction Modification program, is designed to help struggling homeowners avoid foreclosure and stay in their homes, the FHFA stated. The question at hand now is how the program will affect the GSEs bottom lines.
The modification program was approved under FHFA’s statutory authority in the Emergency Economic Stabilization Act of 2008 “to implement a plan that seeks to maximize assistance for homeowners and … minimize foreclosures,” including through a “reduction in loan principal,” while minimizing losses for the Enterprises as well as other provisions of law.
FHFA Director Melvin L. Watt said, "The national housing market has significantly improved in recent years but there are still areas of the country where home values have not recovered and negative equity remains a real problem. The Principal Reduction Modification program we are announcing today, along with the changes we are making to our NPL sales guidelines, will allow an opportunity for delinquent, underwater borrowers in these areas to avoid foreclosure and save their homes."
Eligible borrowers must have loans that are owned or guaranteed by Fannie Mae or Freddie Mac and meet specific eligibility criteria, the announcement noted. However, there is one concern that the program does not address directly: What will happen if borrowers begin to default purposely on their mortgage in order to qualify for the program?
To address the issue of borrowers defaulting on purpose, the FHFA outlined several eligibility criteria to qualify for the program. The modification will be available to owner-occupant borrowers who are 90 days or more delinquent as of March 1, 2016, whose mortgages have an outstanding unpaid principal balance of $250,000 or less, and whose mark-to-market loan-to-value ratios exceed 115 percent. The FHFA identifies more eligibility criteria in the fact sheet released with the announcement.
Approximately 33,000 borrowers will be eligible for a Principal Reduction Modification, the FHFA estimates. In addition, servicers must find and present borrowers eligible for a Principal Reduction Modification by October 15, 2016.
The recent changes announced today by the FHFA will likely reel in some scrutiny from the both the industry and consumers, according to Watt.
“This plan will no doubt be viewed by some as too small and too late and viewed by others as too large and unnecessary. However, the plan is consistent with FHFA’s statutory obligation to ‘maximize assistance for homeowners’ by providing some borrowers what could well be their final opportunity to avoid foreclosure," Watt stated. "It is also consistent with our statutory obligation to provide this assistance in ways that we reasonably expect will not have adverse economic consequences for the Enterprises. By meeting both of these statutory obligations, the program satisfies my commitment to implement a principal reduction plan only if we could structure one that would be a ‘win-win’ for both borrowers and the Enterprises.”
In addition to the Principal Reduction Modification program, the FHFA also announced today that it has approved further enhancements to its requirements for Freddie Mac and Fannie Mae’s sales of non-performing loans (NPLs).
The new enhancements to the NPL sale requirements include:
- Establish that NPL buyers must evaluate borrowers whose MTMLTV ratio exceeds 115 percent for modifications that include principal reduction and/or arrearage forgiveness;
- Forbid NPL buyers from unilaterally releasing liens and “walking away” from vacant properties; and
- Establish more specific proprietary loan modification standards for NPL buyers.