Recent actions by the Federal Housing Finance Agency (FHFA) indicate that the Agency is placing an increased emphasis on the clearing out of Fannie Mae's and Freddie Mac's seriously delinquent loan portfolios and steering more borrowers toward foreclosure prevention and loss mitigation actions, using foreclosure only as an absolute last resort.
In early March, FHFA announced enhanced requirements for the sales of non-performing loans owned or backed by the GSEs. The new requirements state that servers must offer a "waterfall of resolution tactics" that include a short sale, deed-in-lieu of foreclosure, or loan modification before resorting to foreclosure, and requiring bidders for the loans to demonstrate a successful record of loan resolution through foreclosure alternatives.
FHFA Director Mel Watt said that he believed the enhanced requirements combined with the GSEs' non-performing loans (NPL) sales will "result in more favorable outcomes for borrowers and local communities" and will also reduce the losses to the GSEs and taxpayers. Fannie Mae and Freddie Mac have been under FHFA's conservatorship since 2008, when they required a $188 billion bailout to stay afloat. The enhanced rules also encourage servicers to sell REO or foreclosed properties to a non-profit or to someone who will occupy the property as a primary residence.
Both GSEs amassed a backlog of seriously delinquent loans amid massive numbers of defaults in the run-up to the financial crisis and have been working to clear them out ever since. The numbers are steadily declining – both Enterprises reported their lowest level of seriously delinquent mortgage loans since the last decade. Both Fannie Mae and Freddie Mac reported a seriously delinquent loan rate of 1.86 percent for February; Fannie Mae's rate has declined month-over-month for 38 straight months now. Freddie Mac's rate was the lowest in nine years.
To the end of clearing out the GSEs' non-performing loan portfolios, Freddie Mac made its first sale of 2015 in early March when it auctioned off 1,975 NPLs with an aggregate unpaid balance of $392 million. Last year, Freddie Mac made its first sale of NPLs when it sold a bundle with an aggregate UPB of $596 million.
While Freddie Mac's financial report for 2014 indicated that the GSE has helped 1.07 million borrowers avoid foreclosure since 2009, the number has been steadily declining annually since peaking at 275,000 in 2010 at the height of the foreclosure wave. In 2014, Freddie Mac helped 120,000 homeowners avoid foreclosure with either a loan modification, forbearance agreement, repayment plan, or short sale/deed-in-lieu of foreclosure. Granted, foreclosure numbers are not near what they were in 2010, but the government has indicated that there are many borrowers out there who could be taking advantage of loss mitigation programs who are not.