Delinquent homeowners to get no-doc loan mods

Foreclosure Exit SignHomeowners who don’t make a mortgage payment for at least 90 days will soon be eligible for a new no-documentation loan modification program.

The new Streamlined Modification Initiative, announced late last month by the Federal Housing Finance Agency (FHFA), is intended to help borrowers avoid foreclosure and keep their homes. Eliminating the documentation requirement is expected to enable significantly more borrowers to obtain a loan modification.

The program starts July 1 and expires Aug. 1, 2015.

Here’s a quick look at the guidelines:

  • The loan must be owned or guaranteed by Fannie Mae or Freddie Mac
  • The payments must be at least 90 days and no more than 24 months delinquent
  • The loan must be at least 12 months old
  • The loan balance must be equal to or greater than 80 percent of the property value
  • Borrowers must make three on-time trial payments and sign a loan modification agreement to make the mod permanent
  • Loans that have been previously modified more than once aren’t eligible
  • Second homes and investment properties are eligible if they meet certain criteria

Servicers will solicit eligible borrowers

Loan servicers will be required to send an offer letter to eligible borrowers, soliciting their participation in the program. The letter must include a trial period plan that specifies the new payment based on a fixed interest rate, 40-year term and, for some borrowers who owe more than their home is worth, principal forbearance.

Borrowers must be informed that they could get better terms, such as a lower payment or financial incentives, if they document their income and financial hardship and work with their servicer to pursue other foreclosure prevention options, such as the Home Affordable Modification Program (HAMP).

In a statement, FHFA Acting Director Edward J. DeMarco characterized the initiative as an addition to Fannie Mae’s and Freddie Mac’s suite of home retention tools.

“This new option gives delinquent borrowers another path to avoid foreclosure. We will still encourage such borrowers to provide documentation to support other modification options that would likely result in additional borrower savings,” DeMarco said.

Since being placed into conservatorships, Fannie Mae and Freddie Mac have completed 2.7 million foreclosure prevention transactions, including 1.3 million loan modifications, according to FHFA.

How will Fannie and Freddie discourage strategic defaulters?

Homeowners might wonder how Fannie Mae and Freddie Mac plan to discourage so-called strategic defaulters, who are able to make their loan payments but don’t in hopes of getting a loan modification, from crashing the new party.

Here’s the answer from FHFA’s FAQs:

“Fannie Mae and Freddie Mac have existing proprietary screening measures to prevent strategic defaulters from taking advantage of a Streamlined Modification. Additionally, only those borrowers with loans more than 12 months old with a mark-to-market loan-to-value ratio greater than 80 percent and who have not had two or more previous loan modifications will be solicited for participation.”

HSH Associates Financial News Blog

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