For some time now the government has been offering homeowners help to make their homes more affordable through the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP). The programs were created to help distressed homeowners. It gave help to refinance and reduce their interest rates when they otherwise might not have been able to due to drops in home value, or if they are having a problem making their payments it could help them to get their loan modified by lowering the interest rate, extending term or by giving principal reduction.
The terms of the program and who qualifies has changed more than once, including when they allowed second mortgages to be modified, and this past week discussions began anew around changing who would qualify for a loan modification.
In the past only those who could document that they were going through a hardship would be eligible for a loan modification. If new eligibility requirements are passed, homeowners would no longer have to document hardship in order to receive a loan modification. They would only have to miss their payments for 90 days.
Modification To Your Loan, Just By Missing Payments?
Federal housing regulators are now discussing making home loan modifications available to a whole new group of people.
Federal housing regulators took a significant step on Wednesday toward helping borrowers who are falling behind on their mortgage payments — a move that will help more people but also introduce new risks that some homeowners could deliberately stop paying in order to become eligible for assistance.
The Federal Housing Finance Agency, which oversees mortgage finance giants Fannie Mae and Freddie Mac, announced that borrowers who are more than 90 days late on their mortgages will become automatically eligible for a modification to the terms of the home loan. The goal is to reduce monthly payments.
In the past, to be eligible for a mortgage modification, borrowers had to provide documentation they had a financial hardship. They will no longer be required to do so — though providing such documentation will make borrowers eligible for more substantial monthly savings.
“This new option gives delinquent borrowers another path to avoid foreclosure,” said Edward DeMarco, the acting director of FHFA. “We will still encourage such borrowers to provide documentation to support other modification options that would likely result in additional borrower savings.”
So the requirements to get a home loan modification in the past, from the government website:
- You obtained your mortgage on or before January 1, 2009.
- You owe up to $729,750 on your primary residence or single unit rental property
- You owe up to $934,200 on a 2-unit rental property; $1,129,250 on a 3-unit rental property; or $1,403,400 on a 4-unit rental property
- The property has not been condemned
- You have a financial hardship and are either delinquent or in danger of falling behind on your mortgage payments (non-owner occupants must be delinquent in order to qualify).
- You have sufficient, documented income to support a modified payment.
- You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
As highlighted above there had to be a documented financial hardship and a delinquency in payment in order to qualify.
Now you no longer would have to document the financial hardship, although if you do you could be eligible for further savings.
Which Loans Qualify?
The program currently only applies to loans owned or guaranteed by the government agencies, Fannie Mae and Freddie Mac.
The program is only available to loans owned or guaranteed by Fannie and Freddie, which have been government-backed and controlled since late 2008. The relief would come in the form of a reduced interest rate, extended timeline for payments, or other measures.
A borrower would have to meet three consequence payments at the lower level before the modification would become finalized.
Once borrowers receive their interest rate reduction, extended timeline or other relief, they would be required to meet three of the modified payments at the lower level before the modification is complete.
Could This Lead To More Strategic Defaults?
So the question is, will removing the requirement for documentation of a hardship mean that more homeowners will opt to strategically default in order to get a modification of their home loan's terms? I think that could definitely happen.
Some analysts worried that the new program could encourage borrowers to deliberately miss payments in order to become eligible for the program.
“The primary issue is whether this will encourage borrowers to strategically default on their mortgage in order to get the modification. This risk exists because the new program does not require the borrower to demonstrate financial hardship,” Jaret Seiberg, an analyst with Gugenheim Partners, wrote Wednesday. “
FHFA said Fannie and Freddie would use existing “screening measures to prevent strategic defaulters.”
I can't imagine what screening measures they would use to prevent strategic defaulters, and I can definitely see this leading to more people stopping their payments in order to get their home loan modified – even if they don't really need it.
What do you think? Is this a good move by federal housing regulators? Will it lead to more strategic defaults?