Acting Federal Housing Finance Agency (FHFA) Director Edward J. DeMarco has voiced his reluctance to offer principal reductions for Fannie Mae and Freddie Mac mortgages in the past. However, he has recently announced a new measure in an effort to prevent foreclosures for loans owned or guaranteed by Fannie or Freddie. At face value, those measures appear to offer advantages to struggling homeowners, but the new program is receiving criticism for the possible repercussions it may create.
Effective July 1, 2013, the FHFA will allow implement a simplified loan modification initiative for borrowers who are at least 90 days late on their mortgage payments. The initiative proposes to make the process faster and easier because it doesn't require homeowners to produce documentation of an alleged hardship.
This comes as good news for the 26 percent of homeowners who are underwater, owing more on their homes than they are currently worth. They can receive a loan modification that makes their mortgage more affordable by receiving a lower interest rate, a longer-term loan (up to 40 years) or principal forbearance. According to the FHFA, the program requires homeowners to be at least 90 days delinquent (up to 24 months), and their mortgage must be at least 12 months old. An 80 percent or more loan-to-value ratio is also required. Homeowners who have modified their loans previously are eligible; however, those who have modified their loans twice are not qualified.
No proof of hardship will be required. A homeowner will simply have to meet the requirements and make the trial payments according to the requirements and they are approved. This is where the potential problematic implications enter. Those proposed to the program claim that it could entice homeowners who are current on their mortgage payments to go into default in order to reduce their monthly payments. Because the plan requires no proof that the homeowner is not able to make their current payments or experiencing hardship, we may actually see an increase in homeowners who are at-risk of default or foreclosure.
Opponents to the plan claim that this strategy streamlines the process for the borrower and the government, who will reduce the number of documents it collects and evaluates. Because the FHFA is a government agency, it is coming under fire for moral reasons. DeMarco counters this claim by stating that borrowers are still encouraged "to provide documentation to support modification options that would likely result in additional borrower savings." However, such documentation is not required for consideration or approval.
Making it easier for homeowners to reduce their monthly mortgage payment and keep their homes is always favorable; however, providing homeowners with an incentive to fall behind on their payments could be an unfavorable strategy for both taxpayers and homeowners.
Anna Cuevas, ex-bank executive turned homeowner advocate known as "America's Loan Modification Guru," has empowered and guided thousands of Americans in keeping their homes from foreclosure through loan modification self-advocacy. A popular blogger (askaloanmodguru.com), Cuevas has been called a "superhero of the loan modification industry" and has been nominated for CNN's Heroes. She is the #1 bestselling author of SAVE YOUR HOME Without Losing Your Mind or Money.
Follow Anna Cuevas on Twitter: www.twitter.com/annacuevas