From the Wall Street Journal:
Fannie Mae, Freddie Mac and U.S. officials are expected to announce plans Tuesday to speed up the modification of hundreds of thousands of loans held by the housing finance giants, marking the latest effort to try and prevent more foreclosures, people familiar with the matter said.
The announcement could mark the government’s most assertive use of Fannie Mae and Freddie Mac to help homeowners since the companies were taken over in September.
The streamlined effort will target certain loans that are 90 days or more past due, these people said. The program will aim to bring the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates and in some cases forgiving portions of principal debt, these people said.
Borrowers would have to provide a statement or affidavit showing that they have encountered some sort of hardship that has impacted their ability to pay their mortgage. It would only apply to loans made on or before Jan. 1, 2008, and borrowers will be disqualified if they file for bankruptcy. The homes must be owner-occupied and escrows for real estate taxes and insurance must already be set up.
U.S. government officials plan to encourage big banks that hold loans in their portfolios to take similar streamlined modification measures.
The announcement is expected to come at a press conference at 2 p.m. at the Federal Housing Finance Agency, which temporarily has Fannie Mae and Freddie Mac in conservatorship because of their shaky financial condition.
Spokespeople for the companies, the Treasury Department and the Federal Housing Finance Agency weren’t immediately available for comment.
Servicers are expected to be paid $800 for a successful modification and loan investors are expected to reimburse servicers for certain fees associated with the modification. There will be a 90-day trial period, and if borrowers successfully make payments for those 90 days the modification will be formally approved.
This is the beginning of massive government intervention to try and slow foreclosures. On a positive side, Fannie and Freddie could provide a template for servicers to follow which may help homeowners receive a “yes” or “no” answer faster. On the down side, this may also slow the recover of the housing market, prolonging the decline of home prices. Currently 40% of loan modifications re-default. This may also further erode investor confidence in residential mortgage backed securities, the impact being even tighter underwriting guidelines than what we’re now experiencing.
I’d like to see provisions in there regarding proof that the homeowner did not commit fraud when receiving the original loan, and proof that the homeowner has the ability to re-pay the modified loan. But these things take time to ascertain.
Update from Calculated Risk:
Here is the press release from the FHFA. Note that this does not include principal reduction as a solution to create an affordable payment, and is limited to: “extending the term, reducing the interest rate, and forbearing interest”.
This is intended to help “thousands” (a drop in the bucket unless it is several hundred thousand), and seems to encourage homeowners to stop making payments until they are 90 days late.