On April 14, 2016, the Federal Housing Finance Agency (FHFA) announced two changes concerning its policies affecting delinquent mortgage loans: first, it announced that Fannie Mae and Freddie Mac will offer mortgage principal reductions to certain borrowers who are seriously delinquent and underwater, and second, it announced new enhancements to its requirements for Fannie Mae and Freddie Mac’s sales of non-performing loans.
Principal Reduction Modification Program
The Principal Reduction Modification program, which has been under consideration for several years, is intended to help borrowers avoid foreclosure. The program offers a one-time reduction in principal for “seriously delinquent, underwater” borrowers whose first-lien mortgage loans are guaranteed by Fannie Mae or Freddie Mac and who meet certain criteria: (1) the borrowers are owner-occupants; (2) they are at least 90 days delinquent as of March 1, 2016; (3) they have an unpaid principal balance of $250,000 or less; and (4) their mark-to-market loan-to-value (MTMLTV) ratio is more than 115% after capitalization.
FHFA estimates that about 33,000 loans will be eligible for the program – about 2% of all underwater loans nationwide. Borrowers who meet the above criteria will be eligible for a loan modification involving the capitalization of outstanding arrearages, a reduction in interest rate down to the current market rate, an extension of the loan term to 40 years, and forbearance of a certain amount of principal and/or arrearages (sufficient to reduce the MTMLTV to 115%, or 30% of the unpaid principal balance, whichever is less), to be converted to forgiveness. Borrowers who do not want their principal reduced for tax reasons will be able to opt out of the forgiveness element of the modification.
Servicers must begin soliciting all borrowers eligible for the Principal Reduction Modification program by October 15, 2016, and must complete the solicitation by December 31, 2016. Additionally, servicers must solicit all borrowers who are potentially eligible for the program by July 15, 2016, offering these borrowers a Streamlined Modification. Borrowers who believe they are eligible for a modification under the Principal Reduction Modification program but who do not want to wait until October to start the modification process can accept the offered Streamlined Modification, and if they are later determined to be eligible for the Principal Reduction Modification program, the amount of principal forbearance calculated under the Streamlined Modification will be converted to principal forgiveness.
Enhancements to Requirements for Sales of Non-Performing Loans
Concurrently with its announcement of the Principal Reduction Modification Program, FHFA announced that it is adding certain enhancements to the existing requirements for Fannie Mae and Freddie Mac’s sale of non-performing loans (NPLs).
The enhancements to the NPL sale guidelines effect several changes, including that: (1) NPL buyers must evaluate borrowers with MTMLTV ratios above 115% for modifications that include principal reduction and/or arrearage forgiveness; (2) buyers are prohibited from unilaterally releasing liens and “walking away” from vacant properties; and (3) buyers are subject to more specific proprietary modification standards, including that modifications cannot require upfront fees or prepayment of debt, and modifications must either be fixed rate or must offer a low initial rate lasting for at least five years, and subsequent rate increases cannot exceed 1% per year.
According to the FHFA’s press release announcing the changes, these enhancements are designed to further minimize foreclosures, improve the success rate of loan modifications, and “reduce the potential for neighborhood blight and decay.”
Lenders doing business with Fannie Mae and Freddie Mac who may be affected by these enhancements or by the new Principal Reduction Modification program can review the relevant fact sheets (here and here), FAQs, and analysis available on the FHFA’s website for more information.