In a push to simplify loan modifications, many U.S. borrowers who become 90 days or more past due on mortgages backed by Freddie Mac and Fannie Mae will be offered lowered payments without having to prove hardship, the federal regulator of the home-finance giants said.
The streamlined modification program, to be put into effect in July, would reduce monthly payments by about 30 percent on average, officials said in announcing the program Wednesday.
Eligible borrowers would receive letters explaining the modification offer and specifying the reduced payment. If they made three monthly payments during a trial modification period, the new loan terms would become permanent — without them having to document their financial situations.
Fannie and Freddie own or guarantee more than half of all U.S. home loans. They pay mortgage customer service providers — which are mainly large banks — to collect payments, handle foreclosures, and work to modify loans for troubled borrowers.
Problems with servicers have included frequent complaints of lost or mishandled paperwork. And many troubled borrowers have not responded to servicers' efforts to reach them to discuss foreclosure alternatives.
The new program, announced by the Federal Housing Finance Agency, is designed to address those problems, the FHFA said. "This new option gives delinquent borrowers another path to avoid foreclosure," said FHFA's acting director, Edward J. DeMarco.
FHFA officials said they did not believe the new program would encourage a flood of so-called strategic defaults, in which borrowers who could afford to pay fall behind intentionally to get their loans modified. Fannie Mae and Freddie Mac have existing screening measures to prevent strategic defaulters from taking advantage of the program, the FHFA said.
DeMarco encouraged borrowers to apply for modification programs requiring documentation, saying they probably would wind up with lower payments than those generated by the streamlined modifications.
To qualify for the streamlined program, homeowners must be delinquent by at least 90 days but no more than 24 months. The loans must be first mortgages, at least 12 months old, and be for 80 percent or more of the property value. Loans that have been modified two or more times previously are not eligible.
The modifications would cut the interest to half a percentage point above the going rate for conventional loans, which currently would result in a 4 percent rate. The repayment term would be extended to 40 years. And in some cases, borrowers would not be required to pay interest on a portion of the loan balance.
The program does not alter DeMarco's controversial refusal to allow reductions in the principal owed — a policy that has caused many advocates and government officials to call for his ouster. DeMarco has maintained that reducing principal would end up costing taxpayers money and could encourage additional defaults.