Fannie and Freddie to Offer Principal Reductions to Delinquent Homeowners
They said it would never be done, but the FHFA has announced a plan that will offer relief to thousands of delinquent homeowners. In April, FHFA director Melvin Watt announced a plan that would reduce the outstanding principal balances for qualified borrowers. To be eligible, a homeowner would have to be delinquent on their loans for at least 90 days as of March 31, 2016, the loans must be guaranteed by Fannie Mae or Freddie Mac and the loan balance must be less than $250,000 and have a loan to value of more than 115%. The FHFA estimates that 33,000 homeowners will be eligible for this program.
The program works very much like the HAMP and HARP programs of recent years. Lenders will capitalize outstanding arrearages, including interest and add this to the outstanding loan balance. The loan term will be extended to 40 years and the interest rate will be reduced to existing market rates. However, here the programs diverge. Under HAMP and HARP, a portion of the arrearage will go into forbearance for three months while the modification is being approved. The new payment amount is set based on these factors. If Borrower makes payments during the trial period and the modification is approved, the forbearance continues for the term of the modification. If there is a subsequent default, the borrower will be liable for the forbearance amount. Under the new program, the “Principal Reduction Modification Program”, a portion of the arrearage will go into forbearance for 3 months while the modification is being approved and the new payment amount is set based on these factors. If Borrower makes payments during the trial period and the modification is approved, the forbearance becomes a permanent reduction of principal, relieving Borrower of this debt obligation permanently, even in the event of a future default.
In his announcement, Director Watt acknowledged that many people will find this program is “too small and too late”. However, he went on to say that many will argue it is “too large and unnecessary”. I believe this is almost what President Obama intended when he proposed the original HARP and HAMP programs as principal reduction actually helps homeowners. However, I still think that the new program does not go far enough because the extension of the loan term and the capitalization of arrearages/outstanding interest will keep Borrowers upside down for far too many years. The goal of all of these programs has to be to get as many homeowners afloat as possible and allow them to build equity. None of the current programs will fully achieve this goal.