Principal Relief for Stressed Homeowners
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Principal Relief for Stressed Homeowners
By Kathleen Pender
A limited number of underwater homeowners in California will soon be able to get principal reductions of up to $100,000 apiece on Fannie Mae and Freddie Mac loans through the federally funded Keep Your Home California program.
The federal agency that oversees Fannie and Freddie has steadfastly refused to allow permanent principal reduction on loans they own or guarantee on the grounds it would cost taxpayers money. But in mid-September, Fannie and Freddie told servicers they could immediately begin accepting money for principal reductions from programs financed by the U.S. Treasury’s Hardest Hit Fund, including Keep Your Home California.
Fannie’s and Freddie’s willingness to accept money from Hardest Hit Funds does not signal a change of heart on the part of their regulator, the Federal Housing Finance Agency. Lest anyone get the wrong idea, Freddie says it will allow funds to be used for “principal curtailment.”
“We don’t consider it (principal reduction) in a way that is commonly understood. We are not writing off some percentage of the amount owed. We are simply accepting funds … through this program to allow it to be applied to unpaid principal or arrearage,” Freddie Mac spokesman Brad German says.
Fannie Mae spokesman Andrew Wilson says, “This in fact for us is not a principal reduction. It’s a principal payment. It’s as if your grandmother wanted to give you $50,000 to apply to your mortgage. In this case, the grandmother, as it were, was the Hardest Hit Fund.”
Taxpayer funded
That may be, but the money is still coming from taxpayers. The fund was set up in 2010 to provide $17 billion in homeowner assistance to 18 states hardest hit by the housing crisis.
The California Housing Finance Agency set up four programs under the Keep Your Home name to distribute California’s share – $1.9 billion. It allocated $772 million to principal reduction – enough to help an estimated 9,000 borrowers.
It could shift money from the other three Keep Your Home programs to provide more principal reductions, program director Diane Richardson says. The other programs make mortgage payments on behalf of unemployed and delinquent borrowers and provide transition assistance to homeowners who are going through a foreclosure or short sale.
To qualify for principal reduction in California, homeowners must live in the home, owe more than it is worth, be of low-to-moderate income, and be delinquent or have some hardship that puts them in imminent risk of default.
The balance on the first mortgage cannot exceed $729,750. Other rules apply, but there is no asset limitation. The maximum reduction is $100,000 per homeowner.
For eligible homeowners, the program will reduce mortgage payments to less than 38 percent of household income by reducing principal to between 105 and 140 percent of the home’s value.
The goal is to provide a sustainable mortgage payment, not to provide instant equity. For that reason, the principal reduction is structured as a loan that is forgiven after five years.
Five-year plan
If a homeowner gets $100,000 in principal reduction and within five years sells the home for a profit or refinances and takes cash out, the profit or cash-out – up to $100,000 – must be used to repay the loan. After five years, there is no repayment requirement.
Under the original rules, servicers had to reduce principal by $1 for every $1 in principal reduction provided by the program, but few write-downs got done.
In May, the program eliminated the matching requirement and since then more servicers have taken part. To date, 2,511 homeowners have received principal reductions totaling $185.6 million – or roughly $74,000 apiece.
Fannie and Freddie say the elimination of the matching requirement allowed them to participate in the principal reduction program, but servicers are still gearing up to accept the payments.
“GMAC is on board, they are processing manually,” Richardson says. “I think BofA will be on board in early November.” She says the other large servicers have agreed verbally to accept the payments but couldn’t say when.
Bank of America’s program
BofA “is preparing to launch a new Hardest Hit Fund recast program for underwater customers in November,” BofA spokesman Rick Simon says. “This program provides a one-time contribution through the Hardest Hit Fund to eligible customers to reduce their loan balance.
“Monthly payments are recalculated based on the new lower balance. There is no change to the mortgage rate or term.” He says Fannie and Freddie loans will be eligible for the recast program, but state housing finance agencies will control eligibility, application and approval.
Wells Fargo spokesman Tom Goyda says, “We continue to work through the details of how Keep Your Home California funds would be applied to the principal on loans controlled by Fannie Mae and Freddie Mac, but are not yet able to do principal reduction modifications on Fannie and Freddie loans through the program.
“We have participated in a Nevada program that allowed borrowers to apply some of that state’s Hardest Hit Funds to reduce the balance of a loan as part of a Harp refinance.”
The Federal Housing Finance Agency says it has not changed its stance against permanent principal reductions. “Under the California program, the Hardest Hit Funds are paying off some amount of the outstanding loan balance; Fannie Mae and Freddie Mac are not reducing principal and are not sustaining any losses,” agency spokeswoman Corinne Russell says.
In contrast, principal reductions under the Home Affordable Mortgage Program “would have resulted in substantial losses to both companies, both in the form of reduced principal and also from the infrastructure and systems costs.”
