Fannie Mae and Freddie Mac announced earlier this week updates to their policies to address possible interest rate increases on previously modified loans, hoping to prevent distressed borrowers from re-defaulting.
Servicers are now required to evaluate mortgage loans backed by the two GSEs and actively reach out to borrowers to offer a streamlined loan modification if the mortgage loan was previously modified to include a step-rate feature (which allows for a gradual rate increase in the first few years) and if the mortgage rate becomes 60 days delinquent in the first 12 months following a rate increase.
Servicers are required to comply with the updates for loans evaluated on or after July 1, 2015, though they are encouraged to begin complying as soon as possible. The servicer must send the borrower at least one solicitation informing them of the streamlined modification process no later than 15 days after the eligibility evaluation, should the servicer determine that a borrower is eligible for a modification.
The updates to the servicing requirements also removed the requirement that a servicer must immediately pursue a short sale, a mortgage release, or foreclosure proceedings against a borrower should the loan become 60 or more days delinquent within 12 months after the effective date of the loan modification.
The GSEs have made the updates to their servicing programs in order to assist the borrowers who originally modified their mortgage loans through Treasury's Home Affordable Modification Program (HAMP) in 2010 whose five-year modifications are due to reset this year. The streamlined loan modification option is in place to prevent those HAMP borrowers who may not be able to absorb the higher payments that come with interest rate increases when their modifications reset from defaulting – or in some cases, re-defaulting. About 511,000 HAMP modifications with a 2010 vintage are due to reset in 2015; according to Treasury, about 41 percent of those were 90 or more days delinquent 42 months after the modification became permanent. Treasury also has programs in place to help borrowers handle the rate increases, or "step-ups," and avoid re-defaulting.
Only a small percentage of borrowers who default or re-default on HAMP modifications actually go to foreclosure, according to Mark McArdle, Chief Homeownership Preservation Officer at Treasury. Most are able to work out a solution to avoid foreclosure.