Another option will soon be available to help delinquent borrowers avoid foreclosure, as well as help Fannie Mae and Freddie Mac minimize further losses. Beginning July 1, 2013, mortgage servicers will begin proactively offering modification options to eligible borrowers, with no requirement for documentation. Eligibility requirements include, but are not limited to:
- The borrower’s loan must be held by either Fannie Mae or Freddie Mac.
- The borrower’s loan must be at least 12 month’s old.
- The borrower must be more than 90 days delinquent on the mortgage
In the past, loan modifications were tenuous at best. Each lender or servicer had their own process and requirements. Modifications required huge amounts of financial paperwork to prove the borrower’s hardship. They took many months (sometimes over a year) to approve. And more often than not, modifications were denied because lenders felt the borrowers earned too much to show a hardship, or too little to qualify for even a reduced payment.
The potential options proposed to a borrower will be similar to those offered under a more traditional loan modification. Monthly payments may be reduced by offering a lower interest rate, extended payment terms up to 40 years, or principal payment forbearance. However, under these new guidelines, borrowers are not required to submit any documentation. There is no evaluation process. Borrowers would be offered new terms. If they accept these terms, borrowers must demonstrate willingness and ability to pay by making three on-time trial payments. Once completed, the mortgage would be permanently modified.
While this provides another option to delinquent homeowners, the Federal Housing Finance Agency (the government agency that oversees Fannie and Freddie) still encourages delinquent borrowers to discuss all options with their lender or loan servicer. Providing documentation might result in other, more appropriate options with additional borrower savings.
This program might seem wonderful to those homeowners in dire straits and truly in need of some relief. But again, might there be unintended consequences?
The road to hell is paved with good intentions. And virtually every government housing program instituted since the 1990’s has resulted in unintended and often disastrous consequences. Might we see borrowers who can’t qualify for a refinance deciding to strategically default on their current loan? Instead of facing closing costs and “the hassle” of a bank’s underwriting, will borrowers decide to simply stop making payments, only to be rewarded with a lower rate and payment? And Why Not?? Instead of the bank foreclosing, lenders will now offer borrowers a “better deal!”
Will taking advantage of this offer adversely affect a homeowner’s credit? Of course it will! But then again, those targeted borrowers have already taken a hit to their credit because they’re already behind on their mortgage. The real question is, will trashed credit be enough of a deterrent to those borrowers considering a strategic default? In their minds, will the benefits outweigh the consequences?
And lastly, if we do see an increase in strategic defaults, will this really help Fannie and Freddie minimize further losses? Or will we, the taxpayers, be on the hook for even more bailouts?
It will be years before this program proves to be successful or an expensive failure. Meanwhile, if you believe this new program might be an appropriate option for you, please contact and discuss it with your mortgage lender or servicer.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.