Federal Agency Announces Mortgage Modification Plan

Will the plan do enough to stop foreclosures or just temporarily slow them down?


November 17, 2008 -- BLOOMFIELD, MI – At 2pm on Tuesday November 11th, Veterans Day, James Lockhart of the Federal Housing Finance Agency held a press conference. He and several government officials announced FNMA & FHLMC would pursue, “a simplified, streamlined loan modification program to get struggling homeowners into mortgages that they can afford.”

He pointed out that FNMA/FHLMC combined control 31 million mortgages or about 58% of the nation’s total, but only account for 20% of delinquencies. He called on private label mortgage servicers and investor to adopt the FHFA program as the industry standard as they account for roughly 60% of the serious delinquencies.

The program, rolling out December 15th, targets borrowers 90 days or more behind on the mortgage for their primary residence, who haven’t filed for bankruptcy protection. Housing payments will be reduced to 38% of monthly gross income through a combination of lowering interest rates, lengthening loan terms and “deferring payment on part of the principal.”

Servicers will receive an $800 incentive to restructure FNMA/FHLMC mortgages.

Will this be enough to miraculously stop foreclosures and save everyone’s home? That’s impossible and not the goal.

To qualify, homeowners need to show enough income to make a reasonable payment. Homeowners without a job aren’t likely to qualify. With recession spurred unemployment increasing, many will still lose their homes to foreclosure as they won’t be able to make any consistent payment amount.

Notice the announcement doesn’t in any way imply forgiving part of the loan balance. “Deferring payment on part of the principal” only implies “Interest Only” payments, a disappointment for the millions of homeowners upside down in their homes.

Why the requirement of being 90 days behind to qualify? Doesn’t that encourage homeowners to stop making payments to be eligible? Well, most of the “servicers” referred to that’ll be handling the modifications are actually banks, the same banks posting billions in losses and cutting employees as a result. So, the system doesn’t have the resources to help everyone, just the worst off.

The real focus of the program is to stop the “death spiral” of foreclosures causing home prices to drop, causing more foreclosures, causing prices to drop further and on and on until we’re in another depression. If pulled off correctly, it may just succeed.