After years of refusing to provide principal reductions to underwater homeowners, the Federal Housing Finance Agency (FHFA) is heeding homeowner calls for help at last — eight years too late. The FHFA finally announced its new principal reduction modification program to be offered by Fannie Mae and Freddie Mac to underwater homeowners still struggling with their mortgage payments.
The FHFA unveiled the program as an addition to existing Streamlined Modification programs that offer permanent mortgage modifications.
The long-awaited principal reduction aid, much like other belated assistance programs, is arriving to the scene as a last-ditch effort to save homeowners from foreclosure, far after the height of the economic crisis when homeowner assistance was most in demand and the FHFA had the opportunity to provide relief.
While an estimated 33,000 homeowners nationwide are expected to qualify for assistance under the new program, this represents a minute portion of the 4 million U.S. homes that remain underwater as of Q1 2016. California alone has 395,500 negative equity homes, highlighting the sheer inadequacy of the FHFA’s principal reduction to meet homeowner needs in the Golden State.
For those homeowners who are eligible, mortgage servicers are required to solicit homeowners for modification during a relatively small window of time from October 15, 2016 to December 31, 2016.
In addition to the new principal reduction program, the FHFA also amended guidelines for the sale of mortgages in default to promote foreclosure alternatives.
Qualifying for principal reduction
The existing Streamlined Modification program offered by Fannie Mae and Freddie Mac allow severely delinquent homeowners — 90 days or more behind on mortgage payments — an expedited permanent mortgage modification on successful completion of trial payments. The modification includes:
- a reduction in the interest rate to the current market rate;
- an extension of the mortgage term to 40 years; and
- forbearance of the principal amount to the lesser of 115% of the loan-to-value ratio (LTV) or 30% of the unpaid principal balance.
The FHFA’s latest addition of the new principal reduction modification program converts the current principal forbearance modification to principal forgiveness — an adjustment underwater homeowners have needed for years.
To be eligible for the limited assistance provided by the principal reduction modification program, a homeowner is required to:
- have a first-lien mortgage owned or guaranteed by Fannie Mae or Freddie Mac;
- be at least 90 days delinquent as of March 1, 2016 — no strategic defaults at this point;
- have an unpaid principal balance of $250,000 or less as of March 1, 2016;
- have an LTV of more than 115% after capitalization of arrearages at the time of their review for a modification; and
- be the owner-occupant of the property.
After making three timely trial payments and completing the final modification documents, eligible homeowners will earn a permanent principal reduction modification.
How will this program aid California homeowners? The majority of California homeowners are out of luck: with home prices still high in the state, it is unlikely many homeowners in the most populous regions — mainly in the coastal, southern and dense inland areas — will qualify for assistance as unpaid principal balances typically exceed the $250,000 limit. Counties where homeowners are not likely to receive aid due to the majority of mortgaged home values exceeding $300,000, according to the U.S. Census Bureau, include:
- Los Angeles;
- Contra Costa;
- San Diego;
- San Francisco;
- Santa Barbara;
- Santa Clara;
- Santa Cruz;
- Sonoma; and
However, homeowners in more rural economically depressed areas of the state — mainly in the northern and far inland regions, some of which are still struggling to recover jobs — are more likely to meet the program’s eligibility criteria. Counties with a larger portion of mortgaged homes valued below $300,000 include:
- parts of Riverside;
- San Bernardino;
- San Joaquin;
- Tulare; and
Of course, mortgaged home values do not convey the number of homeowners with a remaining principal balance of less than $250,000, but they do provide insight into the varying levels of mortgage debt by region.
Home value trends suggest the regions housing a larger portion of homeowners will likely fall outside the program’s guidelines, while those in economically weakened areas hold a more promising outlook for program benefits.
California homeowners who qualify may get a head start before the program is fully implemented by accepting a Streamlined Modification, allowing their mortgage servicer to later convert the principal forbearance to principal forgiveness under the new program.
However, with only 33,000 homeowners expected to qualify nationwide, it is unclear how many of those will qualify and receive aid in California.
The FHFA is hailing the program as a promising chance to assist at-risk underwater homeowners to further prevent loss of their homes during the “crisis era” — which, as the FHFA needs reminding, began several years ago — continuing assistance the FHFA claims has helped more than 3 million borrowers nationwide since 2008. However, in California’s case, the program is not likely to offer much aid at all.
Regulating the sale of nonperforming mortgages
In addition to finally developing a principal reduction program, the FHFA also enhanced their guidelines for the sale of severely delinquent mortgages to:
- require buyers of mortgages in default — whether a mortgage broker, lender or investor — to ensure a mortgage originated on or before January 1, 2009 is evaluated by the servicer for the Home Affordable Modification Program (HAMP);
- require servicers to evaluate a mortgage originated after January 1, 2009 for proprietary modifications;
- require servicers to assess a mortgage with an LTV exceeding 115% for either HAMP or proprietary modifications; and
- prohibit mortgage buyers from abandoning vacant property, requiring them to foreclose or sell the mortgage instead.
Mortgage buyers will be required to identify their mortgage servicing partners and demonstrate a record of successfully providing foreclosure alternatives to homeowners.
Proprietary modifications may not include an upfront fee or prepayment amount, and need to provide a sustainable modification that offers a fixed rate for the term of the modification or an initial period of reduced payments with limits on subsequent increases.
Servicers will need to implement a “waterfall of resolution tactics” to evaluate homeowners for modification eligibility and provide multiple foreclosure alternatives before resorting to a foreclosure — the last option.
Further, when a home is foreclosed and becomes a real estate owned (REO) property, any sale of the home during the first 20 days after it is marketed must be to buyers who intend to occupy the property as their primary residence or to non-profit organizations. Following the 20-day period, servicers are encouraged to continue to sell property exclusively to owner-occupants and non-profits, but may sell to investors.
Much like the delayed assistance program, the FHFA’s amendments to mortgage sales are being introduced years after the peak of the economic crisis when mortgage sales would have benefitted from increased regulation and homeowners were severely in need of foreclosure relief.
Nonetheless, the FHFA intends the new guidelines to allow for the closer monitoring of mortgage outcomes and expand the availability of foreclosure alternatives in the future — an undertaking that is expected to simultaneously reduce homeowners’ risk and minimize loss to Fannie Mae and Freddie Mac.
Buyers and servicers of delinquent mortgages will be required to report their mortgage resolutions and outcomes to Fannie Mae and Freddie Mac for four years following their purchase of a mortgage. This information will help determine whether buyers and servicers are eligible to purchase mortgages in the future, ultimately helping to prevent foreclosures and increase the availability of foreclosure alternatives to homeowners.