On Wednesday, it was announced by the Federal Government that there is a new loan modification program available for homeowners. This new program is specifically designed to help a larger percentage of homeowners, given the new program does not require the borrower to prove their income or financial hardship status.
The Streamlined Modification Initiative requires that borrowers with home loans that are backed by Fannie Mae or Freddie Mac must be at least 90 days past due on their current mortgages, and they must be able to make three consecutive trial payments on time. This new program is headed by the Federal Housing Finance Agency, the agency that regulates both Fannie May and Freddie Mac.
Past programs, including HAMP, or Home Affordable Modification Program required all borrowers to show proof in documentation of their financial situations, including income and financial hardship information. The requirement of this proof led to many mortgage servicers being unable to provide modifications for risky borrowers, which in turn minimized the overall effectiveness of the modification programs themselves.
Starting July 1, 2013, the new initiative will allow for the more lenient requirements. By this date, all mortgage servicers are required to contact all delinquent borrowers by mail and offer them a chance at loan modification.
The new initiative will provide borrowers with a new interest rate that is either equal to or lower than the current rates they are paying. The rates will be based on the typical averages of 30-year fixed rate mortgages, and borrowers will be allowed a longer term-up to 40 years. Additionally, any borrower that owes more money on their homes than the actual home is worth will not be required to pay any interest on up to 30% of the overall unpaid balance. The predicted savings on monthly mortgage payments is around 30% per borrower.
Eligibility requirements for the new program state that homeowners must be currently between 90 days and 24 months past due on their loans, and their first lien mortgage must be at least 12 months old. Additionally, the total amount that the homeowners currently owe on their mortgage must be at least 80% of the home’s total value.
The FHFA has stated that there are various screening measures in place that will make certain this new initiative program cannot be exploited-in other words, homeowners that purposely stop paying their mortgages will not be able to qualify for a mortgage modification.
Currently, the FHFA does not have a specific number of expected borrowers for the new program, but a recent pilot program showed that 70% of individuals that were offered the new program were willing to participate in the trial, and 50% of those individuals actually obtained a loan modification.
Currently, it is estimated that 1 in every 5 homeowners owe more money on their mortgage than the actual value of their home. This alone is what is slowing down the overall improvement of the real estate market.
In their fourth quarter, Fannie Mae and Freddie Mac have provided assistance for 130,000 homeowners in order for them to avoid going into foreclosure. Since 2008, they have helped approximately 2.7 million mortgage borrowers avoid foreclosure completely. This calculation includes 1.3 million borrowers who were saved through repayment and forbearance plans, loan modifications, and short sales.