FHFA Moves Forward With Principal Reduction Modification Program

The Federal Housing Finance Agency (FHFA) is moving ahead with a controversial plan to write-down the mortgages of about 33,000 severely delinquent, “underwater” borrowers who never recovered from the effects of the Great Recession that began in 2008.

The new Principal Reduction Modification program is a one-time offering for borrowers whose loans are owned or guaranteed by Fannie Mae or Freddie Mac and who meet specific eligibility criteria, the FHFA says in a release.

The modification will be available to owner-occupant borrowers who are 90 days or more delinquent as of March 1; whose mortgages have an outstanding unpaid principal balance of $250,000 or less; and whose mark-to-market loan-to-value (MTMLTV) ratios exceed 115%, among other criteria.

Servicers must solicit borrowers eligible for a Principal Reduction Modification no later than Oct. 15.

The FHFA has also approved further enhancements to its requirements for Freddie Mac and Fannie Mae’s sales of non-performing loans. Now, buyers of these loans must evaluate borrowers whose MTMLTV ratio exceeds 115% for modifications that include principal reduction and/or arrearage forgiveness. In addition, buyers are now forbidden from unilaterally releasing liens and “walking away” from vacant properties owned by these borrowers. In addition, buyers must establish more specific proprietary loan modification standards.

“[The] FHFA has a difficult challenge in trying to help underwater homeowners in some of the markets that are still struggling, as they need to balance the moral hazard risk, identify loans that do not add risk to the [government-sponsored enterprises] or the communities involved, and focus on borrowers that will have the best chance to stay current,” says David Stevens, president and CEO of the Mortgage Bankers Association, in a statement. “[The] FHFA’s program design attempts to mitigate some of these concerns and the result is a narrow focus on lower loan balance and severely delinquent mortgages.”

In a statement, Americans for Financial Reform (AFR) applauds the program, but says it should be broader in scope.

“Principal reduction on underwater mortgages has been a priority for AFR and many of our members, and we have long urged [the] FHFA to adopt this position,” the organization says. “Allowing Freddie and Fannie to reduce the principal owed by underwater homeowners to prevent unnecessary, costly foreclosures – as some private investors have been doing for years – is a positive step.

“The research [the] FHFA itself cites suggests, however, that more homeowners and communities should be included; why not, for example, include underwater properties with loan to value ratios below 115%? More unnecessary foreclosures could also have been avoided had [the] FHFA moved in this direction sooner,” the organization says.

“Although the reach of this program is too limited, it sets an important precedent for [the] FHFA to use more of the available tools to mitigate the losses on underwater mortgages to benefit homeowners and the enterprises alike,” AFR adds. “The requirement that buyers of distressed mortgages from Fannie and Freddie consider all homeowners for principal reduction is also a very welcome step, as are the additional requirements that buyers not walk away from vacant properties. It is important that there be adequate resources devoted to ensuring compliance with these and other requirements. [The] FHFA should also provide timely and detailed public reports on compliance and on the outcomes of the sales. In addition, [the] FHFA should continue to implement additional mechanisms to ensure that communities and homeowners are helped and not harmed by distressed-asset sales.”

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