In California, GSE-Backed Loans to Accept Funds for Reducing Principal

Due to one important adjustment, ""Fannie Mae"":http://www.fanniemae.com/portal/index.html and ""Freddie Mac"":http://www.freddiemac.com/ can soon start accepting funds to be applied towards reducing principal balances in California.

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Different from simply writing off principal or forgiving principal, the GSEs instead, may accept dollars provided through the Hardest Hit Fund (HHF).

The ""Keep Your Home California"":http://keepyourhomecalifornia.org/ program, which was established through the HHF, once required participants to match funds it provided towards reducing principal balances, which could be up to $50,000.

Recently, housing finance agency (HFA) officials from the state announced a decision to no longer require lenders to match the funds the program provides when offering modification assistance for a loan â€" a plan which takes effect in June, the ""L.A. Times"":http://www.latimes.com/business/realestate/la-fi-keep-your-home-20120504,0,3335517.story first reported.

By not requiring lenders to match funds provided by HHF programs, Fannie Mae and Freddie Mac can accept funds through the California program for principal modifications so long as certain guidelines are met.

""As announced last year, Fannie Mae and Freddie Mac (the Enterprises) may accept the pay down of mortgage principal funded through a Hardest Hit Fund program provided other Guide requirements are satisfied. In response to this week's announcement by the California HFA, the Enterprises will work with the HFA to apply its new program to Enterprise loans,"" an FHFA spokeswoman said in an emailed statement.

According to servicer bulletins issued by Fannie Mae and Freddie Mac, GSE servicers are required to participate in modification programs in connection with the HHF under specific conditions, one of which requires no financial contribution on the part of the GSEs.

Another requirement listed in both bulletins is priority for the first lien can't be changed, and the payment must be provided in one lump sum.

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In addition, Fannie Mae's bulletin also stated that ""in the case of a delinquent mortgage loan, any funds submitted must be applied toward curing the delinquency, and if there are any remaining funds, the servicer may then apply them as an additional principal payment.""

Through HHF programs, which are supported with taxpayer dollars, principal reduction was approved as a category in which homeowners could receive assistance, but participation has been low.

According to a report published last month from the Office of the ""Special Inspector General for the Troubled Asset Relief Program"":http://www.sigtarp.gov/ (SIGTARP), a watchdog agency for taxpayers, HHF has only spent 3 percent of its budget as of the end of 2011 and has helped about 7 percent of the estimated number of homeowners it is supposed to assist. Formed in February 2010, HHF has spent $217.4 million of the $7.6 billion available for the program.

In its report, SIGTARP cited lack of participation from the GSEs as one of the reasons HHF programs have been slow to help homeowners. Also, about 78 percent of the help was for unemployment assistance.

In a speech at the Brookings Institution in April, Edward DeMarco, FHFA Acting Director, who has been scorned by public policy makers for not allowing principal reduction, refuted claims that lack of GSE participation will stunt recovery in the housing market, stating, ""This is not about some huge difference-making program that will rescue the housing market.""

According to FHFA data, less than 2 percent of all outstanding loans in California are GSE-backed, underwater, and delinquent.

So far, the largest bank taking part in the principal reduction program offered through Keep Your Home California is Bank of America. Ocwen Loan Servicing is also a participant in the program. Other large banks including CitiMortgage, JPMorgan Chase, GMAC, and Wells Fargo are not part of the principal reduction program offered through Keep Your Home California.

According to a non-agency mortgage market monitor report released by ""Amherst Securities"":http://www.amherst.com/, there has been an increase in April in the use of principal reduction modifications from private investors. The report stated principal modifications numbered 9,161 in April, compared to 7,717 in March and 6,583 in April 2011.

Also, Amherst listed the servicers who are conducting more principal modifications as a percent of their total, and listed Chase (35 percent in March to 41 percent in April); GMAC (16 percent to 20 percent), Ocwen (from 43 percent to 52 percent), and Litton (51 percent to 65 percent).