Wednesday, April 3, 2013

No Hardship Requirement in New Mortgage Modification Program

Do you think you might qualify for a mortgage modification?  Thanks to a recent Fannie Mae and Freddie Mac policy change, the loan modification process is now a lot simpler if you have a mortgage that’s owned or backed by Fannie or Freddie.  According to an article in the Wall Street Journal, Fannie Mae and Freddie Mac will waive the requirement that “borrowers who are already seriously delinquent on their mortgages prove hardship.”  In addition, this policy change will provide homeowners with an easier path to a permanent modification.  It’s intended to be a streamlined effort to cut out the middle man, providing borrowers with a quick and painless decision about their loan modification applications.  In short, Fannie Mae and Freddie Mac are making it a lot easier for homeowners to avoid foreclosure.

How Will the New Loan Modifications Work?
According to the Los Angeles Times, the key difference from the current system is that buyers won’t have to prove a hardship.  Under the old policy, borrowers had to show proof of hardship, and they had to provide specific documentation of their current financial situations before the hardship could become permanent.  Under the old program, many borrowers thought the required documentation of their incomes and hardships was too extensive.
Further, mortgage servicers—not Fannie and Freddie directly—are used to handle loan payments and to conduct modifications.  With the old plan, these servicers often “struggled to implement timely loan modifications” because of the “stringent demands to document borrowers’ financial situations.”  On the flip side, borrowers also complained that the servicers took too long, or that, in some cases, the servicers lost their paperwork entirely, which resulted in denials for loan modifications.
Although the Federal Housing Finance Agency (FHFA) had these previous measures in place to prevent strategic defaults, the risk of strategic default has now become “less of a worry than it was four years ago.”  As a result, the FHFA can offer a new policy that seeks to avoid problems with this extensive level of documentation.  Or in other words, no more required proof of hardship.
The program will begin in July 2013 (this year) and will end in August 2015.  It’s only available for Fannie- or Freddie-backed loans, and the borrowers must be delinquent for at least 90 days, but for no more than 24 months.  In addition, the loan “must be first mortgages, at least 12 months old, and amount to 80 percent or more of the property value.”  According to the Los Angeles Times, this should lead to a reduction by about 30 percent in the average payment, and it should lower the mortgage interest rate to about 4%.  In some cases, borrowers won’t be required to pay interest “on a portion of the loan.”
Will the New Policy Make a Difference?
Housing advocates called the policy change “a step in the right direction,” noting that it will help to address some of the problems that borrowers face with loan servicers.  But they emphasized that it’s still not doing enough to help homeowners who are at risk of foreclosure.  Specifically, advocates argue that the policy change won’t affect the principal loan balance for homeowners.  For example, California Attorney General Kamala D. Harris explained that “more must be done to allow homeowners to benefit from principal forgiveness and forbearance.”
A loan modification need not refer only to the interest rate that homeowners pay.  Rather, according to the U.S. Department of Housing and Urban Development (HUD), a loan modification can be any “permanent change in one or more of the terms of a borrower’s loan” that “allows the loan to be reinstated, and results in a payment the borrower can afford.”
If you have questions about a loan modification, or if you’re concerned about becoming delinquent on your mortgage, contact an experienced attorney today to discuss your options.
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