Wednesday, March 27, 2013

New Foreclosure Prevention Tool for Fannie and Freddie Loans

by Ethan Handelman, National Housing Conference

FHFA announced today its new Streamlined Modification Initiative to enable quicker and simpler loan modifications for borrowers who have not otherwise responded to loan modification options and are more than 90 days delinquent. As such, it could become an important tool for foreclosure prevention by intervening early in the delinquency process.

The program appears designed to provide a simple, standardized modification program for delinquent borrowers that eliminates the paperwork around documenting need. As described by FHFA, the program complements other options (such as HAMP) rather than replaces them.

What’s new and different about this initiative?
  • Servicers must reach out to all eligible borrowers. Beginning July 1, “servicers must identify eligible borrowers who are 90 days to 24 months delinquent and send them an offer letter that states the terms of the modification,” according to the FAQ released by FHFA. The burden is on the mortgage servicers to initiate the modification. The primary qualifications are that the loan is 90 days to 24 months delinquent, has loan-to-value ratio greater than 80% based on current market value, and a first-lien mortgage more than 12 months old that has no more than one modification. FHFA also refers to “existing proprietary screening measures to prevent strategic defaulters from taking advantage of a Streamlined Modification,” but has not made details of that screening available.
  • Only required response from borrower is to make the new, lower, payment. There is no requirement to separately document need or qualification, or indeed to respond other than by making the payment. A borrower may be eligible for better terms through, for instance, a HAMP modification that does require more documentation and interaction with the servicer.
  • Conversion from trial to permanent after three payments. If the borrower makes the modified payment for three months, the servicer will invite them to make the modification permanent. If they miss a payment, they are still eligible for other modification options.
The program would begin July 1 and run through August 1, 2015, but as of this writing it is unclear when servicers are expected to begin outreach to borrowers.

Resources to learn more:

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