Wednesday, November 12, 2008

Government announces "Streamlined Modification Program"

The U.S. government announced a new foreclosure prevention plan yesterday:
The plan centers on Fannie Mae and Freddie Mac, which between them own or back about 31 million mortgages worth a combined $5 trillion. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages.

Eligibility is determined by several factors: Homeowners must be 90 days or more late in their mortgage payments, owe at least 90% of their home's current value, live in the home on which the mortgage was taken and have not filed for bankruptcy.

Their mortgage payments would be adjusted through lower interest rates or longer repayment schedules with the goal of bringing payments below 38% of monthly household income. Interest rates could be lowered for five years and then raised to a predetermined level. Loan terms could be lengthened to 40 years.

Officials said the standards for loan modifications should fast-track changes in payments. The standards will be applied to loans owned and guaranteed by Fannie and Freddie, but officials said they hope they will also be adopted industrywide.

"We expect that it could significantly increase the number of modifications completed," said James Lockhart, director of the Federal Housing Finance Agency, the regulator that oversees Fannie and Freddie. ...

Fannie reported this week that 1.7% of its mortgages by value are delinquent by 90 or more days. Fannie's filings suggest that it has about 18 million mortgages on its books, which would work out to about 300,000 mortgages that could potentially be eligible. ...

But even in cases where declining home prices have taken the value of a home to less than is owed on the mortgage, the balance of the loan will not be lowered under this program.

"This is not loan forgiveness; the loans will be paid but at terms affordable for borrowers," said Brian Montgomery, commissioner of the Federal Housing Administration.

The fact that mortgage balances will not be reduced for the so-called underwater mortgages — those in which a homeowner owes more than the home is worth — will limit the use and impact of the program, according to some experts.
The Washington Post has more details:
Instead of the standard cumbersome loan modification process, which can include reviewing a borrower's credit report and tax returns, the new plan focuses on the borrower's income and how much he or she can afford to pay. It also creates a formula for determining what a homeowner can afford, eliminating some guesswork.

Government officials said they expect the effort, dubbed the Streamlined Modification Program, to be able to help "hundreds of thousands" of homeowners. ...

The program, set to begin Dec. 15, applies only to mortgages owned or guaranteed by Fannie Mae and Freddie Mac, which are involved with more than 50 percent of residential loans. But major lenders, including Bank of America, Wells Fargo and Citigroup, have agreed to apply the formula to loans they administer for Fannie Mae and Freddie Mac and are expected to extend it to their own loans, industry officials said. ...

A borrower who is 90 days delinquent will be eligible for a new loan with a payment that does not exceed 38 percent of his gross monthly income.

To qualify, the homeowner must provide proof that he has suffered a hardship, such as losing a job, that made it impossible to keep up with payments. The terms of the borrower's loan then could be extended from 30 years to 40 years, and if that is not enough, the interest rate could be reduced to as low as 3 percent to make the payments more affordable. The homeowner could be subject to a interest rate increase after a set time, depending on how low their new interest rate is. If those options don't reduce payments enough, part of the principal owed on the loan could be deferred until the end of the loan term.
When I first read that this program is only available to people 90 days delinquent or more, I though it would reward irresponsible behavior. (If you pay your mortgage, you don't get help.) The criteria that the homeowner must "provide proof that he has suffered a hardship, such as losing a job" may prevent this plan from rewarding irresponsible homeowners. However, it may also dramatically reduce the number of financially-troubled people who can take advantage of the program.

Of the various loan modification options available, extending the mortgage to a 40-year mortgage is the least objectionable, because it doesn't give the homeowner free money. It just reduces their payments, while slowing the pace at which they will (eventually) acquire equity in their home. Reducing the interest rate or reducing the principal on a loan effectively gives free money to homeowners, so I generally oppose them.

CNN Money points out that this plan doesn't help most subprime homeowners, who are the people in the most financial trouble.


  1. As a practicing mortgage banker for thirty-one years, I can tell you up-front that Fannie and Freddie's "Prevention Program" will be an ineffective tool in stemming the on-going drop in home prices. These decreases in home values is, after all, the root cause for property foreclosures.

    The two agencies are only attacking the symptoms and not the root cause. The ONLY viable solution for the investors of mortgage-backed securities is to acknowledge they've lost the differences in principal between their existing note balance and the current values being held as security.

    Homeowners are not necessarily walking away from their homes because they can't afford the payments. Instead, most have asked themselves "Why should we continue to make payments on an investment which has gone south?"

    I liken it to a request of one's employer, asking them to temporarily suspend all 401K contributions’. After all, any withholds only vaporize within minutes after being withheld.

    Due to the imbalance of home values versus encumbrance, the original contractual agreement of "Make your payments on time OR ELSE we will take back our security" has been answered with "OK, take back your security".

    The ONLY realistic solution is to provide Homeowners with an incentive to continue making payments thereby keeping additional properties from flooding onto the multiple listing pools nationwide. That solution is to modify the principal balances to current values.

    No new credit report. No new documentation required. No written excuses from one's mother required. Simply a resetting of the home's odometer back to 100% of value with the admonition, a plea, to "STAY IN YOUR HOMES!".

    Keeping foreclosures and their cousin "the short sale" from further entering onto the purchase markets will go a long way in drying up the supply of available homes. This, then, equalizes the natural balance between "Supply and Demand".

    Where there is balance, there is stability. Values stop falling and quickly stabilize into a flat line growth rate while waiting for the incomes of future Homebuyers to catch up.

    Once there are more qualified borrowers who have legitimate incomes to purchase, then and only then, will values slowly begin to increase.

  2. I think this program will go a long way toward helping a specific group of people stay in the homes they live in. However, by leaving investment properties second homes, or homes that are vacant/abandoned out of the program, the excess supply of homes for sale due to foreclosure will continue, further driving down or keeping down prices.

    For those who think principal writedowns are the way to go, I guess you just want to destroy what little is left of the banking industry. Banks require capital (the amount by which their assets exceed their debt). Anytime they write-down the principal balance of a borrower's loan (an asset) they take an immediate hit to capital and report a loss of income. This modification program will allow the bank's to delay that write down to some point in the future, when the borrower decides to engage in a short sale. In the meantime, the borrower gets to stay in their home, obtain a modified mortgage payment of 38% of their income (this payment includes the loan payment plus taxes, insurance and their HOA/condoe fees). If principal writedowns would have worked, then the H4H program would not have the astonishingly limited number of applications (42) that require writedowns.

    This program is also just a start. It needs to be adopted by the Wall Street firms and their investors who got us into this mess.

    Fannie Mae and Freddie Mac control about 60% of all mortgages, but only have 20% of the delinquencies (Fannie has 12+% and Freddie only has 7%). Another interesting fact is that Fannie has a much higher delinquency rate (about 1.5%) than Freddie (about 1%) and Fannie's delinquency rate is growing faster than Fannie's rate. See the graph on p. 11 of the FHFA's second quarter mortgage metrics report. 10/22/2008 FHFA Second Quarter Mortgage Metrics Report Released

    On the other hand, the Wall Street Securitization Market controls about 20% of all mortgages, but is suffering 60% of the delinquencies. Everyone b*tches about Freddie & Fannie being the problem, but the numbers show the culprits are/were Bear Stearns, EMC, Lehman Brothers, and all those other subprime lenders and their investors.

    Those investors are not (yet) participating in this streamlined modification program. They are the ones who killed the real estate market, the mortgage banking industry, the banking industry, and now Main Street.

  3. Doh!

    I meant:

    Fannie's delinquency rate is growing faster than Freddie's rate.


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