U.S. Sets Rules for Mortgage Modifications, 2% Rates

The Obama administration set loan modification guidelines for its $75 billion homeowner rescue plan, agreeing to pay lenders for altering troubled mortgages while reducing borrowers’ interest rates to as low as 2 percent.
By: Dawn Kopecki and Robert Schmidt: Bloomberg.com
The voluntary initiative, announced on Feb. 18, would require applicants to fully document their income with pay stubs and tax returns, and sign an affidavit attesting to “financial hardship,” according to documents released by the U.S. Treasury in Washington today. The second, larger part of the plan relies on government-run Fannie Mae and Freddie Mac to refinance loans.

“This is not going to save every person’s home,” presidential Press Secretary Robert Gibbs said during a briefing. The plan offers help “for those who have played by the rules.”

President Barack Obama’s initial proposal, the biggest federal foray into real estate since the Great Depression, ignited criticism from Republican lawmakers that the government would end up subsidizing homeowners who are financially capable of surviving the economic slump on their own.

“Banks across the country will be inundated with phone calls asking how do I get a 2 percent mortgage, because 100 percent of homeowners will feel they are due now this largess from the federal government,” said Representative Scott Garrett, a New Jersey Republican. He said the plan rewards “bad behavior” and exposes taxpayers to higher risk by imposing too many policy demands on Fannie and Freddie.

Lenders likely won’t be able to offer the loan modifications for a few weeks as they update their technology to process the applications, a mortgage-industry official said on a conference call today with Obama administration officials.

Costs to Borrowers

Obama is seeking to curb a jump in foreclosures that, along with a drop in consumer credit, is lowering property values, dragging down the economy and keeping prospective homebuyers away. The housing market lost $3.3 trillion in value last year, and almost one in six owners with mortgages owed more than their homes were worth, according to a report last month by Zillow.com.

“This plan will help make home ownership more affordable for 9 million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans,” Treasury Secretary Timothy Geithner said in a statement.

The Obama plan has two main parts: helping 3 million to 4 million homeowners who are at risk of foreclosure to lower their monthly payments by modifying loan terms; and using Fannie and Freddie to refinance the loans of 4 million to 5 million Americans who owe more than their homes are worth.

Loan Modification

Borrowers in the first part of the program won’t be charged to modify their loans, while homeowners refinancing through Fannie and Freddie would be responsible for some costs, a Federal Housing Finance Agency official said during a conference call with administration officials today.

For a loan modification, lenders would have to reduce the mortgage payments to no more than 38 percent of the borrower’s income. Then, the Treasury would share the cost for lenders to cut that debt-to-income ratio to 31 percent, the government said.

The modifications would allow a lender to drop the interest rate to as little as 2 percent to achieve the ratio, and if necessary, extend the term or amortization of the loan to as long as 40 years. If more effort is needed, lenders can forbear the principal and in some cases forgive, or reduce, portions of the principal altogether, the documents show.

Lenders that participate in the program for a single loan would be required to modify all of their other loans that qualify for the program, not just the worst performers, unless explicitly prohibited by contract, a Treasury official said during the call.

Secondary Lien

Home-equity loans and lines of credit, or secondary liens, would be excluded from calculating a borrower’s loan-to-income ratio, officials from the Treasury and White House said in the call. The administration is working on providing partial payments to second-lien holders to encourage them to extinguish that debt, officials said. Those guidelines will be released in a few weeks, they said.

“By providing servicers and holders of eligible residential mortgages with incentives to modify loans at risk of foreclosure, the program will promote sustainable alternatives,” the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Office of Thrift Supervision and National Credit Union Administration said in a joint statement.

Borrowers with loans originated before Jan. 1, 2009, will be eligible for the program, which runs through 2012. People living in their homes who have an unpaid principal balance of as much as $729,750 can participate.

Fannie, Freddie

Fannie and Freddie, the mortgage-finance companies seized by regulators in September after their losses threatened to further disrupt the housing market, own or guarantee about $5.2 trillion of the $12 trillion residential home loan market.

The companies will offer, through their servicers, loan modifications and refinanced mortgages as well as help administering the broader loan modification program for Treasury.

Garrett, the ranking Republican on a panel that oversees the companies, challenged FHFA Director James Lockhart in a letter today on whether the administration’s policy allowing Fannie and Freddie to refinance loans without new appraisals or additional mortgage insurance violates federal charters.

The proposal, Garrett said, may violate requirements that homeowners put up at least 20 percent of the appraised value of a home or carry mortgage insurance.

“Due to falling home values, many of the potential applicants for Treasury’s foreclosure mitigation refinancing plan will now find themselves” below that level, Garrett said. “There is no specific language under this title that provides the regulator of these two entities any discretion for when or how to apply this requirement.”