Freddie Mac and Fannie Mae announced this week that they will extend their suspension of evictions caused by foreclosure through the end of February. The initiative, announced last November and originally planned to sunset in January, was designed to give servicers time to review their portfolios and ramp up for the Streamlined Modification Program (SMP).
Suspending evictions is a measure that Robert Padgett, director of Freddie Mac's loss mitigation department, calls ‘vitally important,’ because it ensures borrowers will not be facing a foreclosure sale that would limit their exposure to the program. The SMP is still in its earliest stages, and Padgett says it is difficult at this point to gauge the appropriateness of all the program's details, including its eligibility criteria and implementation guidelines.
Some of the SMP's features may be unfamiliar territory for loss mit specialists, and the program does demand operational changes at most servicing shops. Nonetheless, Padgett does not expect these elements to cause significant problems.
‘The program itself does have some unique characteristics to it that I think everybody's going to have to handle for a period of a time until their systems can get updated,’ he says, noting in particular the challenges of training workers and getting in place all the necessary letters and manuscripts. ‘But I don't think that's an impediment to the program getting rolled out and getting started. I think, conceptually, everybody understands what the program is.’
In short, Freddie Mac's SMP continues the industry trend of modifying loans rather than foreclosing properties by reducing borrowers' mortgage debt-to-income ratios. To achieve this, servicers are delegated the authority to extend loan terms, reduce interest rates and offer partial principal forbearance. Padgett mentions that the process of incorporating tracking and reporting functionalities is a work in progress, and calculating the amount of principal forbearance, specifically, may demand greater attention.
‘How to transfer a portion of the mortgage to a non-interest-bearing silent piece is a nuance that's new,’ he says.
On the topic of interest-rate reductions, servicers are expected to cut the rate in 0.125% decrements until the maximum monthly escrow deficiency payment-to-income ratio of 38% is reached. The new rate then remains in effect for the first five years of the modified mortgage's life if the modified rate is below the lifetime interest-rate cap (which is determined at the time the loan mod package is prepared and equals the lesser of the then-current interest rate on the existing mortgage or the Freddie Mac Weekly Primary Mortgage Market Survey rate for 30-year conforming notes). The interest rate then increases by 1% annually beginning in the sixth year.
‘The step-rate feature, which is something that has been on the market for a while, just hasn't been used to a great extent,’ Padgett comments. ‘It's something that requires a little additional systematic work for the servicers to build.’ Although that 1% increase feature will not come into play for five years, Freddie Mac wants its servicers to build that functionality into their systems sooner rather than later, so that all shops will be prepared.
One of the knocks against the SMP is that the program's eligibility requirements are too stringent and that too few borrowers will actually qualify. Freddie Mac may reevaluate those requirements after the first batch of mortgages go through the three-month trial period and determinations can be made as to what changes need to happen.
‘I think as we roll it out, we're very comfortable with its application and its use and that it will affect a good number of borrowers,’ Padgett says. ‘But as far as what's working and what's not, it's way premature for us to make those decisions on it now.’
One point that Padgett stresses is that servicers have more loss mitigation options available to them than the SMP alone, and just because the program may not be a right fit for one borrower does not mean that borrower will not qualify for an alternative plan. The financial incentives for a successful loan modification are the same, regardless of whether that modification was performed through the SMP or Freddie Mac's traditional modification program. The GSE has been seeing increases in its term extension and rate-reduction numbers, Padgett says.
‘We've been working with our servicers very closely to understand a rate-reduction loan modification is in their authority to offer up to borrowers,’ he adds. ‘We actually give our servicers some delegated authority without having to communicate with Freddie first.’