Fannie Mae Introduces No-Doc Modifications for Delinquent Borrowers

By Gretchen Wegrich

For seriously delinquent borrowers with mortgages owned or backed by Fannie Mae and Freddie Mac, help is on the way. A new program introduced by the companies' regulator will enable borrowers to reduce their monthly payments without documenting finances, announced the Federal Housing Finance Agency (FHFA) today.

The program is designed to limit losses to Fannie and Freddie by allowing borrowers who are at least 90 days delinquent on their mortgage payments sidestep administrative quaqmire associated with standard loan modifications. Homeowners may still present documents proving financial hardship to their lender, saving even more money, said the FHFA.

"This new option gives delinquent borrowers another path to avoid foreclosure," said the FHFA acting director Edward J. DeMarco in a release.

Today, approximately two of every three US home mortgages are backed by Fannie Mae and Freddie Mac. The lending institutions package loans into securities, guaranteeing payments of principal and interest. In January, approximately 3.2 percent of mortgages guaranteed by Fannie and Freddie were at least 90 days overdue, reported the financial companies.

Borrowers and lenders have expressed frustration with the amount of paperwork required to modify a loan under the Home Affordable Modification Program. The new program from FHFA is designed to help borrowers get immediate relief as they wait to find out whether they qualify for additional aid under HAMP (Home Affordable Modification Program).

"If this gets people into a modification and they perform, everybody wins," Julie Gordon, director for housing finance and policy at the Center for American Progress, told Bloomberg News. "No-doc gets results...HAMP should have required far less of this documentation to begin with. There's been unecessary friction."

The streamlined Modification Initiative is set to begin July 1 and end on Aug. 1, 2015, reported FHFA. To qualify, borrowers must be a minimum of 90 days delinquent, have a mortgage loan that is at least a year old, and have less than 20 percent equity in their home.

Modified loans will have fixed interest rates and payment terms lengthened to 40 years, said FHFA. Borrowers who owe more than their homes are worth will not be required to pay interest on some of the principal.

Fannie Mac and Freddie Mac were placed under US conservatorship in September 2008 during the subprime mortgage crisis. Since the takeover, Fannie and Freddie have made 1.3 million loan modifications and 1.4 million other foreclosure-prevention actions, such as short sales and forbearance plans.

The FHFA announced that it had safeguards in place to detect strategic defaults, designed to effectively prevent borrowers from defaulting intentionally in order to get a streamlined modification.

"We are cautious about whether these safeguards will work, but take it as an encouraging sing the FHFA has thought about the issue and has a plan to address this risk," Jaret Seiborg, a senior policy analyst in Washington, told Bloomberg news.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.