FHFA Announces Industry-Standard Loan Modsby Tim Manni
The Federal Housing Finance Agency, regulators of mortgage giants Fannie Mae and Freddie Mac, announced a program yesterday “designed to greatly reduce preventable foreclosures with a simplified, streamlined loan modification program to get struggling homeowners into mortgages that they can afford.”
What makes this program different and somewhat revolutionary is that the FHFA has created an industry standard that defines what makes a home loan “affordable.” Only the “highest risk borrower, who has missed three payments or more,” is eligible for this mortgage program.
The streamline program utilizes several modifying approaches including reducing the interest rate, extending the life of the loan, a change of the loan product (ARM to a fixed rate), and/or “deferring payment on part of the principal” to achieve the “benchmark ratio” for calculating an individual’s affordable payment. The benchmark for creating an affordable payment is 38% of a homeowner’s gross-monthly income.
Homeowners must express a strong willingness and an incentive to pay back their newly-structured loan. The FHFA is confident their program can be a success if “homeowners, banks, mortgage servicers, investors, Fannie Mae and Freddie Mac work together.” That’s a lot of different parties that all have to agree on a central solution. Yet, as home values continue to decline, investors are beginning to look at these types of solutions as the best opportunity to get the maximum amount of their investment back.
What remains troubling to many is that there has yet to be some form of government-sponsored program that focuses on the healthy consumers that can support the market. Just today the Federal Reserve released a joint press release that urged banks to extend money to credit-worthy borrowers:
The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers… Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole.
The FHFA program is aimed at providing help for thousands of homeowners, as Calculated Risk puts it, “a drop in the bucket” of the total problem. Creating the “industry standard” was essential, now the government should focus on getting responsible homeowners into homes.