Fannie and Freddie to Announce Mass Loan Modification Program

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.

76 thoughts on “Fannie and Freddie to Announce Mass Loan Modification Program

  1. I’m tempted to offload my cash and investment assets on my fiance, get myself “laid off” from my current job and stop paying my mortgage, then get a temporary job paying 20 – 40% of my current salary and request a loan modification. Perhaps get the feds to knock off 2% – 3% off my interest rate and 20% – 40% off the principal owed on my 30 year FRM. Then when the loan modification comes through, magically find another high paying job.

    It seems the only people being screwed by the socialist republic of the USA are honest comrades that live within their means and believe in paying off their debts.

  2. I like that the mortgage balances are being deferred as opposed to having a portion of the balance forgiven. And this may put a damper (hopefully) on the loan mod businesses that may be predatory.

    I’m guessing that those who OVERstated income will not qualify as the debt to income ratio used is 38% and there’s only so many tricks up the servicers sleaves to pull this off. Interesting that I’m not seeing anything about a “back end” ratio, which is more important than the front ratio since it factors all debt and not just housing.

  3. It is unfortunate that risky borrowers and risky lenders have to be compensated for their irrisponsible actions. Home owners that do not qualify for loan modifications or principal reducitons, will indirectly pay in a form of equity loss due to these modifications and lenders’ massive discounts. However, the same home owners that benefited from price apreciation that these risky homebuyers, risky lenders, and greedy security investors created did not complaint three years ago.

    They were not complaining when the housing bubble kept pushing prices up. They were happy to accumulate a fortune in their home equity. Even if it was only on paper. I’ve been in the business 18 years and I never saw a home owner complaint about their house value go up to fast.
    You should had sold when it was up like a few did. But like most every body else, you kept enjoying the apreciation of your home while it lasted and kept hoping that it would continue to go up.
    It is only fair that we now pay the price for not taking action when it is required. Now is too late to cry.
    Ride it out and learn your lesson. The only guilty is the supply and demand law. There was a demand for loans and lenders took advantege of the demand. There was a supply of easy qualifying loans and borrowers took advantage of the supply. They both saw the risk, they took it, and now they have to pay for it.

    Like I said, It is not fair that inocent bystanders will pay part of the cost, but inaction is also a form of irresponsibilty.


  4. Re #5 it just shows the ludicrous lengths lugubrious lackeys will go to achieve alliteration. 🙂

    Seattle does not belong in the same sentence as Stockton, except that we both lack NBA teams.

  5. So if I lose my job, is the government going to force my landlord to work with me to modify my lease terms? If they insist on bailing out people in financial trouble with taxpayer money, why should it only be homeonwers?

  6. Armando and LHR, I hear you. I’m not so sure that these loan mod offers are in the homeowner’s best interest. Why continue to pay monthly on an over-inflated asset? Sometimes I think that modifying a loan does more to help the BANK than the homeowner.

    Yes, yes, I’m sure there are cases where it makes sense to stay and continue to pay your mortgage month after month.

    Here’s an example to ponder.

    Home was purchased for zero down for $400,000. Now home is worth more like $300,000.

    I continue to make that modified payment for many years with a mortgage balance somewhere near $400,000 until I can sell or refi (not likely any time soon),

    OR maybe I walk NOW and rent at a much more affordable monthly payment and start to rebuild my credit today.

    I think that the BANKS would rather see people continue to be chained to that monthly payment.

    I’m not so convinced that people are that naive.

    This means I’m not convinced that this program will have a HUGE impact on foreclosures.

  7. “Sometimes I think that modifying a loan does more to help the BANK than the homeowner.”

    Would we be seeing this program otherwise?

    “I’m not so convinced that people are that naive.”

    I wish I shared your optimism.

  8. It favors both the home owner and the bank–at the very least, it buys the home owner some time since they have to make 3 of the reduced mortgage payments on time or they won’t qualify for “the New Deal”.

    It does not help those who own investment properties (or renters) since it’s only for owner occupied.

    Banks do want your interest payments and they want us to stay in debt. That’s why the jack up our interest rates on credit cards, extend credit limits and include those convenient checks along with our credit card bills. Yet when the consumer is buried because they either lack financial control or perhaps they truly had a financial hardship, they cry foul.

  9. CB:

    Too funny!

    Jillayne, there seems to be some disagreement between your quote and CR’s (regarding reduction of principal). I wonder which is right?

    Re #8, the problem with the walk away option is the erosion of confidence. Individuals and organizations will only enter into agreeements that they believe will be honored.

    If people begin to believe agreements are not binding, agreements will cease to be made. If agreements cease to be made, we are heading for FAR deeper doo-doo than we are currently in.

    Check out this interesting graphic from NYT, re underwater mortgages.

  10. Jillayne, re #10, I bought a condo in 1978. After that the market for condos went severely south. One building near me took two developers under, and one building sold the remaining units at auction. It didn’t bother me at the time that the unit wasn’t worth what I paid for it, and it was probably 5 years before I could sell and break even.

    To finish the story I eventually sold for more than 2x what I paid, and if I’d held it a bit longer I could have done 4x. If I’d walked away because I was underwater (I never had an issue with making the payments), instead of the money I still have in the bank from that transaction, I’d have a foreclosure on my record.

    I think in the blog world people view houses too much as an investment and not enough as a home. Also the walking away theory reminds me a bit of how many people investing in the stock market buy high and sell low.

  11. Pingback: Hope Now is “Unavailable” « Northern Virginia Real Estate Voice

  12. I take it this loan mod program will be targeted primarily at people who’s mortgages are more than the value of their homes, right? If so, I agree with Jillayne that it’s hard to see why such individuals would want to participate. Why keep throwing good money after bad? There might be a few upstanding folks like Kary out there, who will fight to keep the home regardless of paper losses. However, I doubt that such responsible individuals would have over-extended themselves so much in the first place.

    Someone who bought a $400,000 house with a zero down option ARM was clearly just speculating. Thus, I suspect that the vast majority of today’s struggling home-owners will just walk.

    Now, if the loan mod reduced the payments to such a level that they were the same as, or lower than, equivalent rents, then I could see a lot of people deciding to stay. What would they have to lose? If the market recovers then everything is peachy. If things continue to go south, they can just walk away later, no harm done.

  13. Regarding all of these modifications. Are these clients going to be charged by the lender to do a modification. I know many modification firms that are modifying mortgages, and I am sure this will hurt them now. Why should people get help on them buying a home that they could not afford. The ones that really nedd its a great thing to do. Someone also had a comment regarding renters. That makes sense that what if a renter lost his job and could pay the rent is their help for them. Why just homeowners????

  14. Sniglet,

    Jillayne and yourself use a relatively high level of sophistication when making financial decisions. There are a lot of people out there whose financial decision making process consists of
    1) seeing something they want.
    2) finding out if they can get credit to buy it.
    and 3) buying it.

    These people probably still want the house, they don’t want to admit to friends and neighbors they can’t afford it, and they don’t want to admit to themselves that the market value of the house has decreased and will continue to do so. They will take any new loan or modification they can get to keep the house.

    Add in all the people in trouble who have reduced work hours, health problems, etc, who also just don’t want to admit they can’t afford the house and the market value is decreasing. There will be some takers.

  15. Also remember that while Fannie and Freddie are now explicitly government backed, this isn’t some welfare measure put forth by the humble saints in the US congress. It is a program adopted by 2 lenders who are trying to limit their losses. It also needs to be attractive enough that other banks will adopt similar measures. They aren’t going to forgive any more debt than required to keep from taking the depreciating asset themselves.

  16. @ Marlene
    “Are these clients going to be charged by the lender to do a modification.”

    No. The underlying lender does not charge the client.

    “Why should people get help on them buying a home that they could not afford.”

    Many people have been asking this same question. This could be referred to as a philosophical moral hazard. This means when we reward someone for behaving in a way that yields unwelcome consequences, then we will likely continue to see the same behavior. Any parent of a small child knows this. This is also why many people were against the government bailing out the banks or any corporation that makes bad decisions (today it’s the car manufacturers. Who will it be tomorrow?)

    “what if a renter lost his job and could pay the rent is their help for them. Why just homeowners????”

    Yes, there IS help for renters at the state, county, and city level. For example, in King County they have In Snohomish County, Volunteers of America runs a homeless endowment fund, funded by donations from the Snohomish Camano Assoc of Realtors that can help people with rental assistance.

    Thanks for stopping by RCG.

  17. Hi Cautious Buyer,

    You’re making a valid point here. I know several people who fit into this catagory:

    “There are a lot of people out there whose financial decision making process consists of
    1) seeing something they want.
    2) finding out if they can get credit to buy it.
    and 3) buying it.”

    Do you think the Fannie Freddie program will be more successful than Hope for Homeowners and FHA Secure?

    I think it *might* be.

  18. “Do you think the Fannie Freddie program will be more successful than Hope for Homeowners and FHA Secure?”

    Maybe. I think there are enough people who would want the modifications who qualify for the program. I don’t know whether you can make them aware of the program and get them to apply for it, or how many will re-default.

  19. Cautious Buyer,

    I just had a friend call me an hour ago. She is paying “as agreed” on her mortgage but wanted to know if she could get a loan mod at a lower rate because her income has decreased in 2008 and she’s been hearing about all these loan modification programs.

    MANY people have had their income decrease in 2008.

  20. I guess they are doing a good job getting the word out. So do you think it’s worthwhile for someone to hold off paying for 3 months and get the modification, or that people will actually do it? How will the loan modification show up on someone’s credit record (other than the greater than 60 days late)? You can add those on to the list of things I don’t know.

    For the record I’m pretty anti-bailout, given that nobody is offering me any money yet. I can see why both the banks and some homeowners would like to successfully to modify these mortgages though.

  21. Hi Cautious Buyer. I do not recommend that a homeowner stop paying for three months in order to receive a loan modification. In order to engage in a tactic like this, a homeowner is better served working through an attorney.

    Possible unintended consequences include: the homeowner doesn’t qualify for the loan mod and ends up with three late payments on his/her credit record, the foreclosure ends up going through anyways….

    I am also anti-bailout because it rewards corporations for taking risks. More bailouts means corporations will continue to take risks and line up for a government handout. Look at how many different corporations are now in line to receive the TARP money? It seems like every day it’s a new industry.

    I am PRO loan modification for homeowners who were victims of egregious predatory lending, homeowners whose loan originator violated state and/or federal lending laws at origination, homeowners who were victims of bait-and-switch advertising, and homeowners who were flat-out lied to by their originator and were told they were receiving a fixed rate loan but instead, their closing papers were for an ARM loan at escrow. I don’t consider this a bailout. Instead, it seems more like the scales of justice evening things out.

    Mass government intervention by way of massive loan mods or a moratorium on foreclosures will only slow down the recovery of the housing market. But…..I believe this is what we’re in for, whether we like it or not.

  22. Well said Jillayne. I’m for stimulus in the form of long overdue investments in the nation’s infrastructure. Maybe we can use this as motivation to stop our 50 year old bridges from falling down and/or to install a modern power generation and transmission system.

    I agree we will end up slowing the housing recovery by slowing the price correction and keeping people in houses they can’t afford for a while longer. We will also prop up some bad companies, and reward their inept, risk taking management. We will certainly come out of it with a ominous national debt. Maybe we can make something good out of it for the next generation.

  23. I sort of doubt purposefully not paying for three months would qualify you for the program, because I’d guess/think/hope that they’d look close enough at your finances to discover that the non-payment was intentional.

    Maybe if you paid the money that would have gone to the mortgage to credit cards, but that would be extremely risky because if they then said no, you might actually end up getting foreclosed unless maybe you could take cash advances on the same cards to get the loan current again (which even if you could do that, might have severe interest rate implications).

    Bottom line is I think it’s unlikely that an attorney would recommend a purposeful default in order to qualify.

    BTW, maybe this can be confirmed by someone, but I’d seen on one TV source that to qualify you had to have not filed bankruptcy (they didn’t say within what time period). Now I can see that as a lending criteria, but not a workout criteria. The IRS, for example, often wants the taxpayer to file bankruptcy prior to a payment arrangement. If no bankruptcy is one of the criteria, it just seems like a backdoor effort to protect (bailout) the credit card companies (banks).

  24. I seems like every home owner should carefully look at this loan modification program. Firstly just compare your current mortgage to what it could be at 3%. The difference is incredible, even for those who already have a decent fixed rate! Steve’s comment in message 1 *potentially* makes a ton of sense. This of course depends on the final details of the giveaway.

    Steve says: “I’m tempted to offload my cash and investment assets on my fiancé, get myself “laid off

  25. #15 – think if you bought the condo at the auction price and sold it later how much MORE money you could’ve made.

    Yeah, I realize that is the definition of greed, but its what got the market in the mess we are in today. I would think if masses of underwater owners decided to start walking out on loans, banks would try harder to work with the people who can pay rather than the ones who can’t.

  26. Let me give you another demo on how amazing 3% fixed interest is:

    $300,000 home loan times 3% fixed for 30 years = $1330 a month

    Comparison: if you currently pay 7% on $300,000, your mortgage is $2100. Moving from 7% to 3% is a $750 monthly savings! Over the course of a year you will save $9000! Over the full 30 years you will save $277,000!! Now you tell me if it’s worth missing 3 consecutive mortgage payments. Research how much 3 missed payments will actually affect your credit rating. You will easily rebuild your credit rating in a few years as you laugh all the way to the bank. The $27,000 you save in the first 3 years will help offset your need for more credit. How long does it take you to put $27,000 in the bank after taxes have been paid and all your expenses met? It takes ages if you’re middle class. Using the numbers above ($300,000 at 3%), you could now afford to pay $27,000 *cash* for a car in just 3 years, merely because you moved from a 7% loan to a 3% loan. Last time I looked, that buys a pretty nice vehicle.

  27. Informed Buyer:

    What evidence is there that folks are getting 30 yr fixed at 3% in a loan modification?

    I have heard of drastic payment reductions, or deferred increases, but they are usually either temporary (3 to 5 yrs relief), or in the form of deferred interest.

    Is it just wishful thinking, of is there real movement to 3% 30 yr fixed rates?

    On a side note, now, even NAR is trumpeting the poor recidivism rate of loan mods.

    Finally, I wonder if they will do loan mods for loan originators who’ve experienced a reduction in income…

    Oh, the irony…:)

  28. Roger wrote: “On a side note, now, even NAR is trumpeting the poor recidivism rate of loan mods.”

    I continue to believe that a simple amendment to Chapter 13 would be a better solution to the problem. Dealing with just the one issue would be like having an unknown health problem and only seeing a podiatrist for a cure. You’d probably still have a relatively high recidivism rate, but if your goal is really to keep people in their homes (as opposed to saving credit card companies), then that would be the way to go.

  29. Roger, unfortunately I have no evidence that a 3% 30 year fixed modification will be available. The points you bring up are valid. Apparently we’re in the early stages where nothing has been settled. According to articles I have read, it could be a combination of things, such as re-valuation, mortgage term extension, etc. I locked onto the 3% because it seems to be prevailing theme. I have primarily read about the modification being in perpetuity.

    I haven’t heard anything about mods covering just a reduction in income. Thus far, it appears 3 payments must be missed, and you must have purchased before Jan 1 2008. Remember, we only reward bad behavior here, not those who have struggled and met their promises 😉

    My main point to homeowners was: keep a very close eye on how this policy finally gets written – it *could* be a tremendous windfall. I would expect this to become official before 2009.

  30. I myself have struggeled to make ends meet as of late. But I refuse to lose and refuse to let my credit and personal life get destroyed. Now is the time you do whatever it takes to survive this helter skelter of the times. Stop being afraid and think of long term. Yes you may suffer today, but tommorrow will be here soon enough and we will all win. Better to have a late payment than a forclosure. You can recover in time from a late payment, but a forclosure? Stop looking for free money and make yourself a winner in the end. It will be ok, and I promise you, you will be the better man or woman. Never give up and seek those who want to harm you with there loser thoughts and destroy them. Stand tall and take the beating, in the end, you will be the champion.

    I wish everyone the very best and if you need me, feel free to e-mail anytime at

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