Call it Hope for Home Flippers.
Fannie Mae is replacing a forbearance program for troubled borrowers with one that will make the breaks available to property investors and owners of second homes. In a forbearance, the government-sponsored enterprise reduces the monthly payment on a mortgage for up to six months. The current program only provides this relief for loans on owner-occupied properties.
The GSE said it wants to give property investors and owners of second homes "new options of support" since they are ineligible for the Obama administration's Home Affordable Modification Program.
That program, which also is restricted to helping borrowers who are in danger of losing their primary residences, involves taxpayer subsidies that could make a modification economically appealing to a lender that would not be otherwise. By contrast, Fannie's motivation for cutting investors more slack appears to fit with its interest in cutting its own losses, and does not require additional bailout funds.
Any kind of workout, including those for investors, involves a "cold calculation" of whether a foreclosure would be costlier, said Steven Horne, the founder and president of Wingspan Portfolio Advisors LLC, a Carrollton, Tex., servicer that specializes in highly delinquent loans. It is easier to work with troubled borrowers who live in their mortgaged homes because they typically have greater interest in holding onto the properties than do borrowers who are not using potentially underwater investments as residences, Horne said. But making reduced payments for six months is "generally a strong indication" that an investor does not plan to walk away, he said.
Fannie announced its plan to retire the six-month-old HomeSaver Forbearance program Tuesday. Its replacement, the Payment Reduction Plan, will also trim the amount of the payment reduction available to each borrower under the forbearance arrangement.
Beginning next month, servicers will be allowed to reduce monthly principal and interest payments by up to 30% for up to six months, instead of the maximum 50% of principal, interest, taxes insurance and other escrow payments under HomeSaver Forbearance.
That program "was designed to demonstrate borrower willingness to pay a reduced monthly payment while providing additional time to determine a more appropriate permanent solution," Fannie said.
A 30% reduction in monthly payments "is more logical" than a 50% reduction since the former is closer to what is typical in a permanent modification, the GSE said.
While Fannie has always offered forbearance arrangements and modifications for mortgages on investment properties and second homes, HomeSaver Forbearance and its successor are key programs.
The Payment Reduction Plan will be the first program a servicer is to consider for borrowers who have suffered a permanent or long-term financial hardship, who do not qualify for HAMP and for whom "a more permanent foreclosure prevention solution cannot readily be determined."
Freddie Mac also offers aid to financially strapped investors.
Under its guidelines, borrowers can secure arrangements under which they can miss payments entirely for periods of three months to six months. (These arrangements can be extended for up to a year overall.)
Such forbearance is aimed at people who have lost their jobs, but loans for homes that are not owner-occupied are also eligible, Freddie said.
Missed payments are added to the loan amount and such offers are made according to calculations of net present value, the GSE said.
The forbearance overhaul is at least the second instance this year of Fannie trying to assist real estate investors.
In a move designed to bolster demand in the housing market, in March Fannie began to accept mortgages to investors who had already borrowed against up to nine other properties, up from the previous limit of three.
But Freddie and lenders did not follow suit, and property investors appear to be buying fewer homes than they did last year.
Created by the Housing and Economic Recovery Act in July last year, the Hope for Homeowners program allows for the refinancing of troubled mortgages into loans insured by the Federal Housing Administration after lenders write down original principal amounts.
That program has generated almost no activity so far, but legislation enacted in May authorized changes designed to make it more attractive.
Eye on Refis
The Mortgage Bankers Association said its seasonally adjusted index of loan applications decreased 13.7% in the week that ended last Friday, as the average interest rate on 30-year fixed-rate mortgages with 80% loan-to-value ratios ticked up 5 basis points to 5.07%.
Its seasonally adjusted purchase index declined 7.6%, and its refinance index, which like the overall index and the purchase index was adjusted for the Columbus Day holiday, fell 16.8%.
Refinance applications as a portion of the total fell 2.4 percentage points to 65%, and the share of applications for adjustable-rate mortgages increased 0.2 percentage points to 6.4%.
Blame the Servicer
As foreclosures have mounted with obvious costs to borrowers, lenders, communities and the economy, a pressing question has been: Why haven't there been more modifications?
One answer has been that they simply do not make as much economic sense for creditors as many have argued.
But in a 59-page report published this month, Diane Thompson, a lawyer with the National Consumer Law Center, an advocacy group in Boston, concluded that the problem lies squarely with servicers, which face "the prospect of near certain loss if the loan is modified and no penalty, but potential profit, if the home is foreclosed."
Among other things, fees determined as a fixed percentage of loan balances in portfolios are servicers' principal source of income, she wrote, giving such companies "an incentive to increase the loan principal by adding delinquent amounts and junk fees."
Thompson called for a "stick" to reform the system, including laws to require consideration of a modification before foreclosure.