James Lockhart on the New Plan to Help Homeowners

From James Lockhart, director of the Federal Housing Finance Agency (FHFA):

As housing prices have fallen, delinquencies on mortgages have tripled, not just for subprime and Alt-A, but also for prime mortgages. Foreclosures have increased almost 150% from two years ago. Foreclosures hurt families, their neighbors, whole communities and the overall housing market. We need to stop this downward spiral.

Today we are announcing a major program designed to greatly reduce preventable foreclosures with a simplified, streamlined loan modification program to get struggling homeowners into mortgages that they can afford. It is an achievable goal if homeowners, banks, mortgage servicers, investors, Fannie Mae and Freddie Mac all work together.

As the regulator of Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks), the Federal Housing Finance Agency (FHFA) strongly supports the Enterprises’ leadership role in setting industry standards for assisting “at risk” borrowers who could lose their homes to foreclosure.

This streamlined modification program with uniform eligibility requirements will be supported by a consistent, efficient process approved by key industry participants. This program resulted from a unified effort among the Enterprises, Hope Now and its twenty-seven servicer partners, the Department of the Treasury, the Federal Housing Administration (FHA) and FHFA.

Fannie Mae and Freddie Mac own or guarantee almost 31 million mortgages, which equates to about 58% of all single family mortgages. Although these mortgages only represent 20% of serious delinquencies, Lockhart believes Fannie Mae and Freddie Mac’s leadership role will spread the modification approach throughout the whole mortgage loan servicing industry.

More from Lockhart:

The performance of private label mortgage backed securities that were sliced and diced and sold to investors is just the opposite of Fannie Mae’s and Freddie Mac’s. Private label securities represent less than 20% of the mortgages but 60% of the serious delinquencies. As the regulator of the housing GSEs that own over a quarter of a trillion dollars of private label securities, I ask the private label MBS servicers and investors to rapidly adopt this program as the industry standard. Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values.

The program targets the highest risk borrower who has missed three payments or more, owns and occupies the property as a primary residence, and has not filed for bankruptcy. To be considered for the program, a seriously delinquent borrower should contact his or her servicer and provide the requested income information. The program creates a fast-track method of getting troubled borrowers to an affordable monthly payment where “affordable” is defined as a first mortgage payment, including homeowner association dues, of no more than 38 percent of the household’s monthly gross income. This affordable payment will be achieved through a mix of reducing the mortgage interest rate, extending the life of the loan or even deferring payment on part of the principal. Servicers will have flexibility in the mix used to get there, but the goal is to create a more affordable payment.

If the servicer is unable to create an affordable payment with this streamlined program, it will further evaluate the borrower’s situation through a customized process. The key to success is the borrower’s ongoing cooperation and communication with the servicer. Borrowers shouldn’t fear working with servicers. They have dedicated personnel who are experienced in working with borrowers who are struggling with finances, but who are eager to keep their homes.

The streamlined modification program complements existing loss mitigation programs. We expect that it could significantly increase the number of modifications completed. Borrowers who participate will be strongly encouraged to seek financial counseling through HUD-approved agencies – particularly, if the default is a result of being overextended or due to financial mismanagement.

Focusing for a moment on this (from above): “Borrowers shouldn’t fear working with servicers. They have dedicated personnel who are experienced in working with borrowers who are struggling with finances, but who are eager to keep their homes.… how long do you think it will take for “Loan Modification Fraud” to become part of the common vernacular!