GSE Mods Target Owner Payments

Washington-Loan modifications completed by Fannie Mae and Freddie Mac in the first quarter are "significantly deeper" than a year ago in terms of reducing the borrower's payments, according to their regulator.

Federal Housing Finance Agency director James Lockhart told a congressional panel that the use of loan modifications by the government-sponsored enterprises has risen "dramatically" since they were placed in conservatorship last September.

More than half (52%) of the modifications completed in the first quarter resulted in a 20% reduction in the borrower's mortgage payments. A year ago, only 2% of modifications involved such large reductions in monthly payments.

Federal banking regulators recently discovered that modifications have "unacceptably high" redefault rates if payments are not reduced by more than 10%.

In 71% of the modifications, the GSEs relied on interest rate reductions and term extensions to reduce the payments.

The FHFA director also noted loan modifications and refinancings will help stabilize the mortgage market and help the GSEs, which are being battered by credit-related expenses and mark-to-market losses.

"The short-term outlook for the enterprises' financial results is poor," Mr. Lockhart told the House Financial Services Committee last week.

Meanwhile, the Obama administration is working to get its Making Home Affordable loan modification program up and running. But it appears the newly launched program will not show real results until later this summer.

Herbert Allison, the president's nominee to be Treasury assistant secretary and run the Troubled Asset Relief Program, told the Senate Banking Committee there is a "great deal of pressure on everyone" to get the program going.

He noted that 14 servicers are already active in the Making Home Affordable program and they have sent modification offers to 100,000 homeowners.

But Mr. Allison warned the senators during his confirmation hearing that it is going to take "time to ramp up and reach full scale." TARP is providing funds for incentive payments and to cover some of the costs of the modifications.

"It is extremely important - to deal with the foreclosure crisis - to reach out to as many people as possible. People are fearful about losing their homes, fearful of contacting their bank or servicer to describe their problem - for fear that it is going to cause a foreclosure on their house," the executive said.

The former president and chief executive of Fannie Mae noted that Fannie and Freddie are willing to work with borrowers as well as banks. In addition, housing counseling is available.

NeighborWorks America, a quasi-governmental entity that specializes in housing counseling, released a report last week that describes loss mitigation departments as "understaffed and overworked."

After a counselor has worked with a borrower and formulated a workout proposal some servicers do not responded for 45 to 60 days.

In addition to lengthy response times, servicers repeatedly lose faxes or mailed documents. Counselors also complain they end up talking with different representatives each time they call.

Its semi-annual report to Congress also shows that only 6% of homeowners who receive counseling lose their home in foreclosure, 74% are still in their homes and 20% sold their homes in a short sale or negotiated a deed-in-lieu to transfer the property to the lender.

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