Government Announces Streamlined Loan Modification Program

Government officials and mortgage industry leaders announced a major initiative Tuesday that is designed to stem the growing number of foreclosures on a national scale by streamlining loan modifications to put struggling homeowners into sustainable mortgages.
The program targets loans owned by ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com. To be eligible, borrowers must have missed three or more payments, own and occupy the property as a their primary residence, and have not filed for bankruptcy. The program will modify the borrowers loan so that the payment is no more than 38 percent of monthly gross income, which will be achieved through a mix of reducing the mortgage interest rate, extending the life of the loan, or deferring payment on part of the principal. Fannie Mae and Freddie Mac loan servicers will be responsible for implementing the program by the December 15 deadline and will receive $800 for each loan they modify under the new framework.
The new loan modification program was outlined by James B. Lockhart, chairman of the Oversight Board for the government's ""$700 billion rescue package"":http://dsnews.comview_story.cfmxid=2971 and director of the ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA), which now oversees Fannie Mae and Freddie Mac. Lockhart was joined at the podium by Neel Kashkari, interim assistant secretary for financial stability and supervisor of the Treasury's ""Troubled Asset Relief Program"":http://dsnews.comview_story.cfmxid=3009 (TARP); Brian Montgomery, commissioner of the ""Federal Housing Administration"":http://www.fha.gov (FHA); Faith Schwartz, director of the ""HOPE NOW Alliance"":http://www.hopenow.com; and Michael Heid of ""Wells Fargo"":http://www.wellsfargo.com.
The program is the result of a unified effort among the two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac; HOPE NOW and its twenty-seven servicer partners; the ""Department of the Treasury"":http://www.treasury.gov; FHA; and FHFA. It is modeled after the systematic loan modification protocol implemented at ""IndyMac Bank"":http://dsnews.comview_story.cfmxid=2797 by Sheila Bair, chairman of the ""Federal Deposit Insurance Corporation"":http://www.fdic.gov (FDIC). Late last month, Bair proposed a separate national, ""incentive-based foreclosure prevention plan"":http://dsnews.comview_story.cfmxid=3070, but it was met with ""opposition from the White House"":http://dsnews.comview_story.cfmxid=3110.
Critics say that this new GSE-led loan modification program falls short of offering the broad-based assistance that is needed because it applies solely to whole loans owned by the two agencies, and as Lockhart himself said, Fannie- and Freddie-owned mortgages represent only about 20 percent of seriously delinquent loans. Mortgage-backed securities (MBS) that were sliced and diced and sold to investors, on the other hand, represent less than 20 percent of mortgages but 60 percent of the serious delinquencies.
""I ask the private label MBS servicers and investors to rapidly adopt this program as the industry standard,"" Lockhart said today. ""Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values.""
In addition, it is expected that the lender/servicer members of the HOPE NOW Alliance will quickly adopt the same streamlined program as protocol. Several large institutions have already announced similar aggressive loan modification initiatives, including ""Bank of America"":http://dsnews.comview_story.cfmxid=2974, ""JPMorgan Chase"":http://dsnews.comview_story.cfmxid=3109, and most recently, ""Citigroup"":http://dsnews.comview_story.cfmxid=3146.
""We commend Director Lockhart and FHFA along with Fannie Mae and Freddie Mac for taking the lead in developing and adopting this streamlined approach to loan modifications and helping establish these important new industry standards,"" Kashkari said. ""We also commend HOPE NOW for their continued leadership in bringing the industry together for a common solution. It is important to note the powerful example large lenders are providing by applying this protocol to their own mortgage portfolios.""
According to Lockhart, while 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 percent from just two years ago, as the housing crisis has reached full force. ""Foreclosures hurt families, their neighbors, whole communities, and the overall housing market. We need to stop this downward spiral,"" Lockhart said.
Kashkari acknowledged that stabilizing the country's financial system will require not only strengthening the liquidity of its financial institutions - i.e. the Treasury's $250 billion recapitalization program - but also helping homeowners avoid preventable foreclosures. Kashkari concurred with previous declarations by Treasury Secretary Henry Paulson that ""there is no silver bullet to address the housing downturn."" Instead he said, ""We must explore all tools to help homeowners and increase the availability of mortgage finance.""