Under a new Streamlined Modification Initiative announced by the Federal Housing Finance Agency, mortgage servicers must now offer borrowers who are 3 to 24 months delinquent a plan to help avoid foreclosure.
Unlike the Home Affordable Modification Program, an earlier government initiative known as HAMP, this one carries no burdensome documentation requirement. Borrowers may be approved without providing any proof of financial hardship.
The elimination of paperwork coupled with a proactive approach should benefit borrowers, said Timothy M. Dwyer, the chief executive of Entitle Direct, a direct-to-consumer title insurance company. “All it takes is for the borrower to make that new payment and they’re in the trial period of the program,” he said. “It can’t be any more simple than that. There’s not even a requirement that you sign something, send it in and have it approved.”
Borrowers must make three monthly payments on time before the modification becomes permanent. The program applies to loans owned or guaranteed by Fannie Mae or Freddie Mac. The start date was to be July 1, but an agency spokesman said Fannie and Freddie had already begun the program. It expires Dec. 31, 2015.
The program applies to primary residences, investment properties and second homes. Borrowers may have up to 20 percent equity in the property.
The intention is to get distressed borrowers into modified loans early enough to keep them out of foreclosure. The formula used to calculate the new payment is the same as for standard modifications under Fannie and Freddie, said Diane Cipollone, the director of the Fair Lending Training Program for the National Fair Housing Alliance. That formula is not based on income and affordability, so not all borrowers will necessarily find that the new payment amount makes an appreciable difference in their financial circumstances.
“The payment that results merely has to be equal to or less than the unmodified payment,” Ms. Cipollone said.
One category of borrowers likely to benefit from the streamlined program includes those who fell behind because of “a big interruption in income or some unexpected expense, and but for the arrears, they’re back on track,” she said. Under the modification formula, the arrears are added to the loan balance and the term extended to 480 months. The interest rate is currently about 4 percent.
Borrowers who are “underwater” — or owe more than their homes are worth — will not pay interest on up to 30 percent of the unpaid loan balance. The program does not allow for a reduction in the principal balance, however.
The solicitations being mailed to borrowers will also include information about HAMP. Borrowers may apply for a HAMP modification and still begin making payments under the streamlined program, Ms. Cipollone said.
HAMP may save more money for qualifying homeowners because the payment is based on 31 percent of gross monthly income. But Ms. Cipollone says it is restricted to loans originated before Jan. 1, 2009; the streamlined program applies to loans held for at least a year.
Mr. Dwyer said it would be interesting to see if the new program was any more effective than HAMP at keeping people in their homes. A report from the special inspector general for the Troubled Asset Relief Program found that homeowners who received HAMP modifications in 2009 defaulted at a rate of roughly 40 percent.
Article source: http://www.nytimes.com/2013/06/23/realestate/loan-modifications-proactively.html?partner=rss&emc=rss