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THE NATION’S HOUSING
Homeowners can modify loans sooner
Kenneth R. Harney covers housing issues on Capitol Hill for the Washington
Post Writers Group. You can write to him at P.O. Box 15281, Chevy Chase, Md.
20815 or send e-mail.
kenharney@earthlink.net
Here’s some good news for homeowners facing tough financial times: You no
longer have to miss two to three months of payments before your mortgage
company can modify your loan terms.
Starting immediately, Fannie Mae will allow borrowers who face imminent
financial difficulties to request early loan alterations, even if they’ve
never been late.
Fannie’s policy change has the potential to help thousands of people who are
losing jobs or facing layoffs as the recession crunches onward.
Most lenders and loan servicers traditionally have declined to intervene in
mortgage problems until borrowers are 60 to 90 days late.
At that point, loss-mitigation staffs can try to work out solutions through
rescheduling of back payments, forbearance, extending the loan term and
other techniques.
Under Fannie Mae’s revised approach, servicers of the company’s loans will
be required to inform borrowers that if they are reasonably certain that
changes in their income will cause them to miss mortgage payments, they
might qualify for a loan modification in advance.
Borrowers who qualify will enter into a trial period — usually four months —
of reduced payments. If they make payments on time during the trial, the
modified mortgage terms could be made permanent.
For example, say your spouse loses a part-time source of income, and
suddenly you’re short $400 a month needed to make your $2,000 mortgage
payment. In the past, if you called your loan servicer, you’d likely be told
that longstanding rules prohibit any help to you until you have become
delinquent by several months.
But by that time, you might be thousands of dollars in the hole, racking up
big late-payment penalties.
Under the new plan, by contrast, Fannie’s servicers can now tell you
upfront: We’ll try lowering your monthly payments to accommodate the $400 in
missing income. If you’re current on the lowered payments after a four-month
trial and your income situation hasn’t rebounded, we’ll make the change
permanent.
Officials said servicers will examine the facts in each case, check income,
credit reports and other documentation to ensure that borrowers aren’t
faking income shortages just to get a lower payment.
Fannie’s new loan-modification program puts the company in sync with a
number of other large mortgage institutions that have begun reaching out to
borrowers facing economic strains before they end up in serious delinquency
or foreclosure.
For instance, JPMorgan Chase chairman Jamie Dimon says he expects his
company to work with as many as 400,000 customers who might be in danger of
missing payments. Bank of America has announced a similar effort.
Freddie Mac has permitted its servicers to negotiate early modifications in
some circumstances for years, according to spokesman Brad German, although
the company has not aggressively publicized it to borrowers.
With the addition of Fannie Mae, most major players in the mortgage market
now say they offer some form of early intervention for consumers heading for
defaults. But there’s a big unknown here: If your servicer modifies the
terms of your loan, will you stay out of trouble? Or might you fall behind
again?
The jury is still out. On the one hand, some recent federal statistics show
that 53 percent of modified loans end up in re-defaults within six months.
Modification advocates such as Sheila Bair, chairwoman of the FDIC, argue
that changes to loan terms that go deep enough to meaningfully deal with
borrowers’ ongoing financial problems succeed at far higher rates.
One of the country’s largest servicers of delinquent subprime mortgages,
Ocwen Financial of West Palm Beach, Fla., agrees. Less than one-quarter of
its modifications — often involving significant cuts in interest rates and
payments and sometimes even reductions in principal debt — end up
re-defaulting, said Paul Koches, the company’s executive vice president.
KENNETH HARNEY
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