April 15, 2016

The Federal Housing Finance Agency (FHFA) announced yesterday a new program under which Fannie Mae and Freddie Mac will forgive certain borrowers’ outstanding mortgage principal to help them stay in their homes. The new Principal Reduction Modification program marks the first time that FHFA has allowed Fannie Mae and Freddie Mac to offer struggling borrowers principal reductions.

The scope of the program is limited. To be eligible, a borrower must occupy the home as a principal residence, have been at least 90 days delinquent on their mortgage payments as of March 1, have a remaining mortgage principal balance of $250,000 or less, and have a total outstanding mortgage balance that is at least 115 percent above the current value of their home. FHFA estimates that 33,000 Fannie Mae and Freddie Mac borrowers will be eligible for assistance through this initiative. In a fact sheet describing the program, FHFA argues that the program’s narrowly tailored eligibility standards will allow Fannie Mae and Freddie Mac to help struggling borrowers without putting the firms at risk of substantial financial losses.

All Fannie Mae and Freddie Mac loan servicers will be required to identify those borrowers with mortgages in their portfolios that are eligible for the Principal Reduction Modification program and contact them by October 15. Those borrowers who wish to participate will at first have their loans adjusted in a manner consistent with Fannie Mae and Freddie Mac’s Streamlined Refinance program. This means that their mortgage interest rate will be lowered to the current market level, the term of their mortgage will be extended up to 40 years, and a portion of their outstanding mortgage principal (equal to the lesser of the amount needed to lower the outstanding mortgage balance to 115 percent of the home’s current value or 30 percent of the borrower’s unpaid principal balance) will be put into forbearance. The principal in forbearance will be forgiven outright if the borrower is able to make the first three payments on their modified loan in a timely matter.

Borrowers who may be eligible for principal reduction but have not yet been contacted by their servicer will be allowed to have their loans modified through the Streamlined Refinance program. If the borrower is later determined to be eligible for the Principal Reduction program, their principal forbearance will be then be forgiven. If the borrower is not eligible, they will be allowed to continue in the Streamlined Refinance program.

FHFA also released a comprehensive analysis of the new Principal Reduction Modification program and a Frequently Asked Questions guide for interested borrowers.

FHFA also announced yesterday that it was making several changes to its requirements governing Fannie Mae and Freddie Mac’s non-performing loan (NPLs) sales. The changes are designed to ensure that those investors who purchase the NPLs make an effort to help the borrowers whose loans they purchased avoid foreclosure and to promote neighborhood stability. Specifically, NPL buyers will now be required to evaluate certain underwater borrowers to see if they would be eligible for loan modifications that include principal reduction. Buyers would also be prohibited from unilaterally releasing liens they purchase on abandoned homes. FHFA released a fact sheet explaining the new guidelines in more detail.