Homeowner Bailout: Do You Qualify?

November 19, 2008

After shifting gears and deciding that buying toxic assets wasn’t such a good idea after all, the federal government announced two new bailout plans that finally focus on homeowners. Are you a homeowner who could find some financial relief from these new plans? Maybe, but there are a lot of unanswered questions.

The Federal Housing Finance Agency (FHFA), conservator of Fannie Mae and Freddie Mac, unveiled a new relief plan on November 11th that can help homeowners in trouble on their mortgages.  It offers a program to make their loans more affordable and keep them out of foreclosure. Three days later the FDIC announced its own similar bailout program.

Who Qualifies?

The FHFA plan applies to mortgages held by Fannie and Freddie, and to certain other mortgages held by a list of banks who are part of the “Hope Now” housing consortium. A “streamlined loan modification program” designed to put “seriously delinquent” homeowners into more affordable loans will be put into place by December 15.

These highest risk borrowers will qualify if:

1. they are three or more payments behind on their mortgages;

2. they currently occupy their homes;

3. they have not filed for bankruptcy;

4. their unpaid principals are more than 90% of the current value of their homes

5. they certify that their current situation is a result of  hardship or change in financial circumstances.

If homeowners meet these criteria, they can work with their mortgage service providers to reduce their monthly payments so that they do not exceed 38% of their gross household income. These reductions can come about through a combination of reduced mortgage interest rates, extended loan periods, or deferred payments on some of their principal.

The FDIC announced a similar program of loan modifications for loans delinquent 60 or more days. Loans under this program can be modified to reach a 31% monthly income level. The loan-to-value calculations are, however, a bit more complicated under the FDIC plans.

Incentives for Loan Servicers

Both programs contain benefits for mortgage service providers who participate in the loan modification program. The FHFA will pay them $800 for every successfully modified loan, and the FDIC will pay $1,000. This is to encourage as many servicers as possible to participate in the program and not force homeowners into foreclosure.  Providing a fee for modifications is an incentive for servicers, because, in the past, they usually got higher fees for doing a foreclosure.

Why two plans, and do you qualify? The two plans attempt to reach as many affected mortgages as possible. Fannie and Freddie own or guarantee almost 60% of all single family mortgages, but they only represent 20% of the serious delinquencies. The participating members of Hope Now hold many mortgages internally and can likewise engage in loan modification programs.

Many mortgages, however, were bundled and sold as mortgage backed securities to investors.  That creates an extra hurdle for homeowners seeking loan modifications for those underlying mortgages, because the homeowner can’t negotiate directly with the entity that owns the loan. These “Private label securities” make up less than 20% of the mortgages, but 60% of the serious delinquencies.

The FDIC program is designed to lure as many non-Freddie and and non-Fannie mortgages into participation as possible by offering an FDIC guarantee of 50% of any modified loans that re-default after modification. In other words, if a borrower and lender participate in the FDIC loan modification program, and the borrower later defaults on the newly modified loan, the FDIC (i.e., taxpayers) will guarantee 50% of the loss to the affected lender.

The FDIC estimates that these potential guarantees will cost $24.4 billion based on past experience, but will help avoid almost 1.5 million foreclosures. Since foreclosures drive down the housing market everywhere, it is hoped the program will help stabilize the market.

But holders of these mortgaged backed securities may tell the lenders: “Wait a minute! You can’t change my investment that way without my permission.” In fact, a group of investors has done exactly that in connection with a group of mortgages that were going to be modified under a settlement between Countrywide Financial and 15 state attorneys generals. Investors holding such securities may not just sit back and allow their investments to be “modified” without their say-so.

So if you are seriously delinquent on your mortgage, the first question is whether your mortgage even qualifies under these programs. If it is a loan Fannie or Freddie either guarantees or owns, the mortgage will qualify. If the mortgage is held by one of the participants in Hope Now and not securitized, the mortgage will qualify. If, however, your mortgage is non-Freddie or non-Fannie AND has been securitized, you may be out of luck.

How can you find out if your mortgage qualifies? You’ll have to demand that your mortgage service provider reveal to you whether your loan comes under either the FHFA or FDIC program. If it does and you otherwise qualify, there may be relief for you under the new programs. As far as initiating the necessary procedures, these will have to be worked out by the agencies between now and December 15.

For homeowners whose mortgages do not qualify, the only real help can come from Congress. It will take legislation to force securitized mortgages into these programs. If you are in this category, write or email Congress and demand action. You didn’t ask that your mortgage be sliced up and sold as a security, so why should you suffer as a result?

Also, foreclosure moratoriums, like the temporary one announced by Fannie and Freddie last week for the holidays. have become necessary. Most servicers, while working on loan modifications, proceed with foreclosures anyway, and the foreclosure might nullify your modification attempts. We have heard horror stories of homeowners who were on the verge of a successful loan modification only to discover that their homes have been sold out from under them through foreclosure. One homeowner even found out her personal belongings had been trashed by Freddie Mac, because the foreclosure had overtaken her loan modification efforts which were on the verge of success!

When more details on the two new programs become available, Consumer Warning Network will post details to inform affected homeowners.