In a push to simplify mortgage modifications, federal regulators announced a streamlined process that doesn't require borrowers to prove a hardship.
"This new option gives delinquent borrowers another path to avoid foreclosure," Edward J. DeMarco, acting director of the Federal Housing Finance Agency, said in a statement announcing the modifications Wednesday.
The new modifications, however, would not include reducing the loan balance, a move promoted by housing advocates and others but resisted by DeMarco, who says it would end up costing taxpayers money and would encourage defaults.
California Atty. Gen. Kamala D. Harris — one of a group of nine attorneys general who have called for DeMarco's ouster because of his principal-reduction stance — called the program "a step in the right direction by FHFA." But she added: "More must be done to allow homeowners to benefit from principal forgiveness and forbearance."
In most cases, FHFA officials said, borrowers would save more money by documenting their incomes and expenses. But the new program would cut down on documentation requirements because many troubled borrowers never respond when asked to apply for modification programs requiring financial documentation, or they struggle to provide all the necessary information.
The modifications would be available to borrowers with Fannie- or Freddie-backed loans. They 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 amount to 80% or more of the property value. Missed payments will be added to the new loan balance. Loans that have been modified two or more times previously are not eligible.
Borrowers would see their payments slashed by an average of about 30%. The modifications would lower the mortgage interest rate to half a percentage point above the going rate for 30-year fixed loans, or about 4% at present, and stretch repayments over 40 years. Some borrowers also would not have to pay interest on a portion of the loan.
Fannie and Freddie, controlled by the government since the financial crisis, own or guarantee more than half of all U.S. home loans. They pay mortgage customer-service providers to collect payments, handle foreclosures and work to modify loans for troubled borrowers.
Consumer advocates and housing counselors said the program would help address some frequently heard complaints about the loan servicers, most of which are arms of the country's largest banks.
"We continue to hear numerous and harrowing stories about servicers losing documents, dual tracking and improperly denying borrowers relief to which they are entitled," said Kevin Stein, associate director of the California Reinvestment Coalition in San Francisco. "More automatic modifications can get around these problems."
Dual tracking is the practice of pursuing a foreclosure at the same time a borrower is applying for a modification to avoid losing the house.
Stein and others complained about DeMarco's refusal to include principal reduction in the FHFA's efforts to assist borrowers and reduce losses at Fannie and Freddie by avoiding foreclosures.
"Offering a 40-year loan at today's interest rate without a lot of hassle will certainly help," said Glenn Hayes, chief executive of Neighborhood Housing Services of Orange County. "It would be much better if they'd just bite the bullet and do a write-down" of the amount owed. "These people are never going to pay off a 40-year loan anyway."
Fannie and Freddie will require servicers to send letters to eligible borrowers explaining the modification and specifying the reduced payment. After receiving three on-time payments, the servicers are to send a formal modification agreement, which when signed and returned will make the modification permanent.
FHFA officials said they did not believe the changes would trigger large numbers of strategic defaults, in which borrowers who can 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.
UC Irvine law professor Katherine M. Porter — appointed by Harris to monitor whether banks are complying with the terms of a $25-billion national settlement of abuse claims — praised the program for shifting the burden for loan modifications from families to the servicers.
"One of the real problems in dealing with borrowers has been procedures — delivering relief, the communications, the lost documents," Porter said.
"This initiative appears to create an easier process, particularly for people who have difficulty in communicating with servicers because they work odd shifts, have a language barrier, have trouble collecting documentation."