FHFA Announces Principal Reduction Modification Program, Enhancements to NPL Sales Requirements

The Federal Housing Finance Agency yesterday announced that Fannie Mae and Freddie Mac will offer principal reduction to certain seriously delinquent, underwater borrowers who are still struggling in the aftermath of the financial crisis to help them avoid foreclosure and stay in their homes.   

FHFA said the new Principal Reduction Modification program is a one-time offering for borrowers whose loans are owned or guaranteed by Fannie Mae or Freddie Mac and who meet specific eligibility criteria.   

The modification will be available to owner-occupant borrowers who are 90 days or more delinquent as of March 1; whose mortgages have an outstanding unpaid principal balance of $250,000 or less; and whose mark-to-market loan-to-value ratios exceed 115 percent.  

FHFA said it expects as many as 33,000 borrowers will be eligible for a Principal Reduction Modification. The program was approved under FHFA’s statutory authority in the Emergency Economic Stabilization Act of 2008 “to implement a plan that seeks to maximize assistance for homeowners and…minimize foreclosures,” including through a “reduction in loan principal,” while minimizing losses for the Enterprises as well as other provisions of law.  

Servicers must solicit borrowers eligible for a Principal Reduction Modification no later than October 15.  

Mortgage Bankers Association President and CEO David Stevens, CMB, expressed hope that FHFA’s targeted program can help some families who meet the program’s requirements.

“FHFA has a difficult challenge in trying to help underwater homeowners in some of the markets that are still struggling, as they need to balance the moral hazard risk, identify loans that do not add risk to the GSEs or the communities involved, and focus on borrowers that will have the best chance to stay current,” Stevens said. “FHFA’s program design attempts to mitigate some of these concerns and the result is a narrow focus on lower loan balance and severely delinquent mortgages.”  

Stevens noted mortgage servicers have been actively working to help borrowers through the Home Affordable Mortgage Act and other modification programs. “This provides them another tool with which to do so, although it is important that consumers understand that FHFA and the GSEs will be identifying borrowers for eligibility,” he said.

FHFA also announced approved enhancements to its requirements for Freddie Mac and Fannie Mae’s sales of non-performing loans. The new enhancements: 1) establish that NPL buyers must evaluate borrowers whose MTMLTV ratio exceeds 115 percent for modifications that include principal reduction and/or arrearage forgiveness; 2) forbid NPL buyers from unilaterally releasing liens and “walking away” from vacant properties; and, 3) establish more specific proprietary loan modification standards for NPL buyers.  

The new enhancements draw on the experiences of Freddie Mac and Fannie Mae with NPL sales over the past year and are consistent with current practices of most NPL investors. They are designed to minimize foreclosures, help mitigate the potential for neighborhood blight and decay, and help improve loan modification success rates.   

“The national housing market has significantly improved in recent years but there are still areas of the country where home values have not recovered and negative equity remains a real problem,” said FHFA Director Melvin Watt. “The Principal Reduction Modification program we are announcing today, along with the changes we are making to our NPL sales guidelines, will allow an opportunity for delinquent, underwater borrowers in these areas to avoid foreclosure and save their homes.”  

Watt defended the Principal Reduction Modification program, noting it will “no doubt be viewed by some as too small and too late and viewed by others as too large and unnecessary, but said the plan is consistent with FHFA’s statutory obligation to maximize assistance for homeowners by providing some borrowers what could well be their final opportunity to avoid foreclosure.   

“It is also consistent with our statutory obligation to provide this assistance in ways that we reasonably expect will not have adverse economic consequences for the Enterprises,” Watt said. “By meeting both of these statutory obligations, the program satisfies my commitment to implement a principal reduction plan only if we could structure one that would be a ‘win-win’ for both borrowers and the Enterprises.”  

FHFA provided the following attachments:  

–Fact Sheet: Principal Reduction Modification: http://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/Principal-Reduction-Modification-Fact-Sheet.pdf.  

–Frequently Asked Questions: Principal Reduction Modification: http://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/Borrower-FAQs_04-14-16.pdf.    

–FHFA’s Analysis of a Principal Reduction Modification Program and Enhanced Non-Performing Loan Sales Requirements: http://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/Public-Analysis_4-14-16.pdf.  

–Fact Sheet: Enhanced Non-Performing Loan Sale Guidelines: http://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/NPL-Fact-Sheet_04-14-16.pdf