Streamlined Loan Modification: Discouraging Responsible Homeowners?

The Federal Housing Finance Agency unveiled a new program last week that will enable Fannie Mae and Freddie Mac borrowers to lower their mortgage payments if they’ve fallen behind. The program, called the Streamlined Modification Initiative, will require all servicers whose borrowers are 90 days delinquent or more on their mortgages to offer them an easy way to lower their payments.

The kicker: There will be no financial qualification requirements, and no requirement to show hardship of any kind.

All you have to do is fall behind 90 days on your mortgage. Then take the servicer up on the modification offer. Take the money you saved up by not paying your mortgage for three months, and make three “trial” payments on time, and you’re in. The mortgage modification becomes permanent.

If you can show hardship, you may be able to qualify for additional modifications. But anyone can qualify for this program simply by falling 90 days behind on a qualifying mortgage owned by either Fannie or Freddie.

At first glance, this is a slap in the face to anyone who has been busting tail and making sacrifices to keep up their mortgage payments, who resisted the urge to buy more house than they could afford, and who made the kids share a bedroom while their peers were living it up in McMansionville.

Since there’s no requirement to show hardship, the temptation is strong to join the club. To get yours while the getting is good.

Not so fast.

More on that in a bit – let’s get back to looking at the program itself.

Eligibility

Eligibility is straightforward:

  • The loan must be owned or guaranteed by Fannie Mae or Freddie Mac.
  • You must be at least 90 days delinquent, but not more than 24 months. If you’re current, you don’t qualify.
  • If your loan has already been modified twice or more, you don’t qualify.
  • You must have a first-lien mortgage at least 12 months old.
  • Your loan-to-value ratio must be at least 80 percent. If you were dumb enough to build more than 20 percent equity in your home, you don’t qualify.

News of this program comes as the FHFA’s acting agency head, Edward DeMarco, has been coming under increasing fire from Democrats and consumer advocates for not being friendly enough to struggling homeowners, and being too slow to grant needed modifications to people struggling to remain in their homes.

It’s all a matter of perspective. If you’ve been doing your best and struggling and you’ve fallen behind on your mortgage payments despite a Herculean effort to keep up, you’ll welcome this news.

If you’ve been spending irresponsibly, screwing off on your job search and buying vacations, sports cars and dinners out while neglecting your mortgage payment, you’ll also welcome this news.

If you’ve been playing by the rules, and busting your tail to keep current on your mortgage, foregoing all kinds of luxuries and experiences and depriving your family in order to keep up with your mortgage payments, you might be enraged and feel like you’ve been played for a sucker.

Should You Do It?

At first glance, it’s tempting to just stop paying your mortgage and wait for the letter. But be careful. You’re still going to pay the money. And if you have good credit, you may be able to simply refinance to today’s lower rates even without the Streamlined Modification Initiative.

On the other hand, if you become 90 days delinquent on a mortgage payment, you’ll take a big hit to your credit rating. And if you are legitimately going through a severe financial hardship, you may be able to get a better deal under HAMP rules anyway, by contacting your servicer and showing the extent of the hardship. At any rate, the FHFA states that it has some proprietary techniques for identifying “strategic defaulters” who are abusing the privilege.

This program would probably work best for those who have severely damaged their credit and who would not be able to refinance anyway.

The program is set to expire in August of 2015. However, if interest rates rise, the program likely won’t be as attractive at that time as it is now.

Will it Work?

Projections about the success of programs like these are difficult because the assumptions needed to make an assessment go to the vortex of financial theory and consumer psychology. To the extent that the program can prevent a full foreclosure and eviction, and retain a performing loan on the books – even if it’s not quite performing at the level originally expected when the loan was made at a higher interest rate – it will be successful.

To the extent it encourages strategic defaulters, and thereby simply replaces high-interest loans with lower-interest loans, the program is counterproductive. The FHFA is essentially betting that few quality borrowers will voluntarily damage their credit and stop paying for three months to modify to a lower interest rate, or that their screens are able to reliably identify people who are abusing the program. They are also betting that a substantial portion of these people who fall 90 days behind or more were not going to avoid foreclosure – and all its attendant costs – without some kind of leg up. And if they can’t keep up with even the reduced payments, the lending industry is not out very much. The mortgage principal is still eventually due, and the lender will have to do its best to recover its losses via the foreclosure process in either case.

My own Spidey-sense tells me that many borrowers who have been working hard and making sacrifices to stay current on their mortgages – maintaining their payrolls and paying income, self-employment, and capital gains taxes while supporting an increasing number of people – are getting tired of watching other people get over on them. As a result, they may be increasingly willing to consider becoming part of the problem instead of part of the solution.

The potential danger ahead: A preference cascade of people formerly willing to keep up their mortgage payments through thick and thin suddenly signing on to programs like these.

Additionally, lending is fueled, ultimately, by investors. For a lender to make a loan, someone, somewhere, must be willing to put his capital at risk in the expectation of a reasonable interest rate. Yes, there is a risk of default. That’s why they charge interest – to compensate for the risk. When the government encourages people to pay a lower interest rate – sticking the investor with the prepayment risk and reinvestment risk bill – the temptation is there to withdraw capital from the lending market and do something else with it.

Comments

anthony waal - May 3, 2013 at 1:51 pm

re: Ashley,
if you are behind and are suffering from a documentable hardship such as a divorce, disability etc. you are eligible for a modification thru your lender. However, you’re probably going to need professional assistance top get this done. Especially since your local bank doesn’t participate in the Federal programs. You can visit Libertyfs.com for assistance.

Ashley - April 30, 2013 at 6:35 pm

I’m searching high and low for an answer to my mortgage problem. I’m hoping to get some much appreciated guidance here:
* My first mortgage is serviced by the originating bank (small local bank). It is not Freddie Mac or Fannie Mae guaranteed. Is my understanding that this bank does not work with HAMP or HARP.
* Due to business condition as of recently, loan was two months behind, but I was able to bring it current with the help of a family loan. I have another payment due in 15 days which I know I will not make.
* My credit score at this point is no good. 7 credit card companies have judgments against me.
* Tax records list my home value at $390K although market value is probably around $680K
* Mortgage balance is about $500K at 6.90% fixed 30 years.
* A bank insider told me that she has heard the bank has made loan modifications to a 4.5% 3-1 ARM with no cap after 3 years when converting into a fixed! I shiver at the thought of hyperinflation 3 yrs from now and a fixed rate of 16%
* I’m considering filing Chapter 7, but have been advised to hold off until I can get loan modification

Any kind suggestions as to what I can do to lower my mortgage and save my home?

Marlene Jacques - April 23, 2013 at 12:19 pm

The cut off date that Fannie Mae or Freddie must have securitized the loan on or before 2009 excludes numerous qualified homeowners whose loans are underwater. Acting Director Edward DeMarco has refused to eliminate the arbitrary cut off date. So, most responsible homeowners are not able to refinance through HARP 2.0 in order to reduce their monthly payments.

Brad Yzermans - April 9, 2013 at 5:41 pm

I have no idea why they would do this….all people have to do is apply for a HARP 2 refinance and they can easily reduce their rate and payment and won’t even trash their credit score 100+ points by falling 90 days behind.

This still doesn’t solve the fact the borrower is probably way upside down in their home and it could take 5-8 years just to get back to 100% LTV….or even longer to have enough equity to sell with-out it being a short sale.