Commentary: DeMarco Disappoints with New Streamlined Mod Program

Commentary: DeMarco Disappoints with New Streamlined Mod Program

04/24/2013 BY: GUEST CONTRIBUTOR: DAREN BLOMQUIST

Starting July 1, large numbers of non-paying borrowers will have the opportunity to modify existing mortgages through a more streamlined process.

This sounds like a good way to reduce foreclosures and prop up home prices, but as we will shortly see, the proposed program is oddly risky and likely to encourage additional defaults.

According to the Federal Housing Finance Agency (FHFA),Fannie Mae and Freddie Mac will offer “a new, simplified loan modification initiative” to borrowers who are at least 90 days late with their mortgage payments. Modifications can include a lower rate, a loan term stretched to 40 years and principal forbearance in some cases.

“The loan,” says FHFA, “must be owned or guaranteed by Fannie Mae or Freddie Mac. Homeowners must be 90 days to 24 months delinquent, and have a first-lien mortgage that is at least 12 months old with a loan-to-value ratio equal to or greater than 80 percent. Loans that have been modified at least two times previously are not eligible.”

The program is open to borrowers who have already modified their loans once, perhaps a few years ago when rates were higher. This, at least, is a good idea.

So what’s the big difference between the new program and the modifications offered previously?

No-Doc Modifications

FHFA says the “key difference is that borrowers will not be required to document their hardship or financial situation, but will be able to accept a Streamlined Modification Offer by simply making the trial period payments and agreeing to the terms of the modification.”

The new government initiative is in some ways commendable: We surely want fewer people foreclosed and if there’s a way to modify mortgages that makes financial sense for both lenders and borrowers then we should take a look.

Unfortunately, the FHFA program misses the mark. WhatFHFA is proposing would not attract any sober investor were it not for the guarantees that will be provided by Fannie Mae and Freddie Mac, guarantees that should not be given in this case.

Just as FHFA Acting Director Edward J. DeMarco has rightly resisted principal forgiveness because it doesn’t make financial sense for American taxpayers who are ultimately the investors backing Fannie and Freddie loans, so he should resist a program that encourages more defaults, resulting in deeper losses on those same loans.

In a statement provided with the announcement of the new program, DeMarco still encourages “borrowers to provide documentation to support modification options that would likely result in additional borrower savings.”

But the bottom line is that documentation is no longer required.

It is understandable and even laudable to give troubled homeowners the chance to prove themselves worthy of a loan modification by making three trial payments. But eliminating the requirement for these homeowners to show they have a financial hardship before entering the trial modification period creates a moral hazard.

Those who can afford to make their current mortgage payment will be rewarded if they strategically default, in which case they can qualify for a program in which their new monthly payment is lower. The end result: Fannie and Freddie—and ultimately taxpayers—get a lower rate of return on a loan without any evidence that lowering that rate of return was necessary.

The reason given for eliminating the hardship documentation requirement: it “eliminates the administrative barriers with document collection and evaluation.”

Sounds more like a rationalization for cutting corners rather than a solid defense of doing what is right for the American taxpayer.

Daren Blomquist is a VP at RealtyTrac..

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