The Federal Housing Finance Agency (FHFA) is ready to streamline the mortgage modification process for hundreds of thousands of borrowers in the United States. According to a statement by acting FHFA director Edward J. DeMarco, who has been a polarizing figure in the housing market recovery, delinquent and underwater mortgages guaranteed by Fannie Mae and Freddie Mac could be modified in a no-doc fashion starting in July.
The Streamlined Modification Initiative
Speeding up the pace of home loan modifications has become a priority for mortgage lenders and investors. Reducing monthly mortgage payments has been proven to help American borrowers avoid foreclosure and thus contribute to the overall recovery of the housing market and the U.S. economy. When mortgages guaranteed by Fannie and Freddie fall into delinquent status greater than 90 days, the entire housing economy suffers.
Keeping Fannie and Freddie in good financial shape has become an economic priority, especially with the Federal Reserve Bank's third round of quantitative easing (QE3) that consists of purchasing mortgage-backed securities. The no-doc modification initiative announced by DeMarco will allow delinquent borrowers to tap the benefits of the Home Affordable Modification Program (HAMP) without facing cumbersome red tape.
A Long-Term, Fixed-Rate Future
To qualify for a no-doc HAMP mortgage, borrowers must have fallen into a 90-day late status on their monthly mortgage payments. The home loan must have seasoned for at least a year and the actual loan-to-value (LTV) ratio must be higher than 80 percent.
HAMP loans lock borrowers into long-term, fixed-rate mortgages that take advantage of today's ultra-low interest rates thanks to the Fed's QE3 policy. The loan term on this modifications can be up to 40 years, and some borrowers who owe considerably more than what their properties are worth will be exempt from paying interest on the underwater portion of the principal.
The no-doc HAMP initiative is planned to last until August 2015. Many analysts do not believe that QE3 will last that long, and thus mortgage interest rates could be higher at that time and HAMP may cease to be attractive. According to a recent report in Bloomberg Businessweek, Fannie Mae and Freddie Mac have computer models in place to avoid potential HAMP abuse by strategic defaulters who may abuse the system by intentionally becoming late on their monthly mortgage payments just so that they can get a free pass at refinance.
This streamlined modification initiative aims to curb losses at Fannie Mae and Freddie Mac, although both agencies have recently reported healthy financial statements and have shrugged off the need for additional bailout funding from taxpayers.