Where Fannie and Freddie’s Loan Mod Plan Falls Short

Fannie Mae and Freddie Mac’s regulator announced Tuesday that the housing finance giants will implement a sweeping plan to prevent distressed borrowers from losing their homes to foreclosure. The new program, which goes live December 15, aims to speed up the loan modification process by using a more-streamlined protocol.

Here are the details:

1. The new plan is designed to keep struggling borrowers in their homes by reducing their monthly payments to no more than 38 percent of the borrower’s gross monthly household income.

2. This could be accomplished by reducing the interest rate, extending the length of the loan, or lowering the principal of the loan.

3. Borrowers who are 90 or more days late on their mortgage and live in their property are eligible to participate. The program only applies to single-family homes, and you cannot participate if you are in bankruptcy.

(See full fact sheet here.)

4. Loan servicers will be contacting eligible barrowers to participate. But you can also call your servicer to see if you are eligible.

“It’s definitely a step forward,” says Howard Glaser, a mortgage industry consultant and a U.S. Department of Housing and Urban Development official during the Clinton administration. “They do have several hundred thousand eligible loans, and Fannie and Freddie are likely to be better than the private industry has been in applying modifications across the board because they don’t have the shareholder issue to deal with.”

But there are limiting factors, Glaser says. “Fannie and Freddie’s share of high risk mortgages is very small compared to the market as a whole. And as you get into 2005 and 2006, sixty five percent the mortgages were done in securitizations outside Fannie and Freddie--and that’s where most of the trouble is.”

Indeed, James Lockhart--Fannie and Freddie’s regulator--said in a speech announcing the program that “private label securities represent less than 20% of the mortgages but 60% of the serious delinquencies.”

And that’s where the plan falls short, says Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School of Business. The program does no apply to loans in most private label mortgage-backed securities. Instead, Lockhart is asking investors and servicers of such securities to do so voluntarily. “I ask the private label MBS [mortgage-backed securities] servicers and investors to rapidly adopt this program as the industry standard,” Lockhart said.

But simply asking them to do so is not enough, Wachter says. The private sector has demonstrated that it is “unwilling or unable” to voluntary modify loans in significant numbers since the onset of the crisis, she says. “There’s hope here, but its moral suasion,” Wachter says. “And we don’t have a lot of time to see if moral suasion works.”