FHFA Loan Reduction, Reduction: What’s Your Function?


The Fair Housing Financing Agency has announced the details on the principle reduction program. The program is severely limited and requires that reductions be made only to owner-occupied borrowers who are 90 days or more delinquent as of March 1, 2016. The program will only apply to borrowers whose mortgage have an outstanding unpaid balance of $250k or less, and whose market-to-market loan-to-value rations exceed 115%.

Thus, the program is likely targeted towards the lower and middle class borrower who are upside down. This program clearly discriminates against the middle class borrower who purchased homes in the $250,001.00 to $417,000 loan limit range insured by the FHFA. Where is their relief? Many of these borrowers were offered homes based on inflated appraisal values.

Under the proposed rules, the FHFA said that approximately 33,000 borrowers are potentially eligible for the “final crisis-era modification program.”  The reality is that the number of eligible borrowers is actually less than that.
A new report, published Monday by the FHFA, states that the FHFA now estimates that more than 30,000 borrowers will be eligible nationwide – the number is 30,761 to be exact.  The FHFA report, states that the reduced number of eligible loans can be attributed to “the fact that the housing market is continuously evolving and may have improved in some areas.” Great excuse FHFA- by the time the program is done, Lending Lies team members predict that less than 12,000 homes will receive principle reductions based on prior results of the FSHA and GSEs.

Even more worrisome is attempting to predict how the FHFA and the loan servicers will use this program to ensure a default and foreclosure occurs. We predict that applications will be lost, eligible people will be foreclosed on during negotiations or turned away- and the program will end as soon as the intended public relations blitz creates the illusion that your government genuinely wants to help. We’ve seen how this type of program plays out when you get servicers administering assistance programs- the programs become a tool to engineer a default.

Since the program already requires homeowners to be at least 90 days past due on your loan, how many homeowners will be told to simply skip three months of mortgage payments to become eligible? All of a sudden the borrower’s options diminish quickly and the unsuspecting homeowner loses their home.
Don’t be fooled, we’ve been down this road before. Why must a homeowner fall behind 3 months on their mortgage payments? Because it will likely make it almost impossible for most families who have no savings to come up with a lump sum to cure the arrearage to stop a foreclosure sale. This is but another tactic to strip lower-middle class families of their homes and the end result will be a nation of renters who can never build any true wealth.

Back to the story. Where will these eligible borrowers be located? According to the FHFA report, eligible borrowers “tend to be concentrated in communities across the country that have not yet fully recovered from the foreclosure crisis, especially in states with long foreclosure timelines.”
The latest FHFA report actually sheds more light on that, showing the top ten states where the eligible borrowers are.

According to the FHFA report, the top ten states with the most potentially eligible borrowers are located in:
Florida – 6,260 potentially eligible borrowers
New Jersey – 6,257 potentially eligible borrowers
New York – 2,823 potentially eligible borrowers
Illinois – 2,434 potentially eligible borrowers
Ohio – 1,214 potentially eligible borrowers
Pennsylvania – 1,109 potentially eligible borrowers
Nevada – 1,032 potentially eligible borrowers
Maryland – 726 potentially eligible borrowers
Connecticut – 703 potentially eligible borrowers
Massachusetts – 682 potentially eligible borrowers

The FHFA report also provides more detail on the delinquency status, loan balances, and loan-to-value ratios of the eligible borrowers.

In Florida, for example, the 6,260 potentially eligible borrowers have an average loan balance of $156,719, an average LTV of 158%, and are an average of 1,590 days delinquent, which is nearly 4.5 years.

In New Jersey, the 6,257 potentially eligible borrowers have an average loan balance of $171,403, an average LTV of 163%, and are an average of 1,791 days delinquent, which is almost 5 years.
According to the FHFA, the principal reduction modification terms include capitalization of outstanding arrearages, an interest rate reduction down to the current market rate, an extension of the loan term to 40 years, and forbearance of principal and/or arrearages up to a certain amount to be converted later to forgiveness. This sounds like a pretty good option for those borrowers who are likely to lose their home.

However, when the government offers a plan that appears too good to be true- it usually is. Most modifications we have examined in the last year are not a good deal for the homeowner, and in the majority of cases the homeowner would be better off letting the home go back to the servicer. Typically, the homeowner will end up paying all arrearages, their payment will go up, and at the end of the 40 year term there will be a balloon payment required.

The process of capitalizing outstanding arrearages typically makes it impossible to modify the principal value of the home. The FHA admits that the average home in Florida is 4.5 years delinquent. The arrearage on a 200k home would be around $48,000 and with late penalties probably another $10k or more. The program doesn’t make sense because the homeowner is still going to end up in a loan where the own more than the property is worth.
This may be the reason behind the program for the FHFA. If they can get borrowers to sign new loan documents (even if they can’t afford the payments), they can “fix” all of the loans that have major title issues including robosigned and fabricated documents. This program could create the illusion that the homes that were in the home reduction program convey clear title (when they don’t and never can).

In theory, the federal government benefits in these ways from the home reduction program:

1. They create more defaults by telling people to fall behind 90 days or lost their applications. Thus creating larger arrearages that can’t be cured (or even forcing a homeowner over the $250k limit by delaying if the numbers are close).
2. They can use the program to create new loan documents to ‘fix’ title issues.
3. They can collect some of the payments before the home once again falls into default (which is likely since the borrower will have larger payments and balances amortized over 40 years).
4. With the continuing cooling real estate market, the homeowner will be underwater.
I won’t get into how the FHFA and servicers will issue reduction programs on loans they don’t own- but apparently the federal government housing agencies create the rules as they go.
At Lending Lies, we are gearing up for more calls from homeowner who lost their home while being considered for a loan reduction plan. Next year we will field calls for homeowners who accepted reduction programs that were unaffordable and resulted in the loss of their home. We hate to be skeptics, but the HAMP program actually caused more suffering and resulted in more home losses than it saved. This program, just like HAMP, sounds great on paper- but the numbers and strategy only work in a land of make-believe.

Eligible borrowers should expect a letter from their mortgage servicer about a principal reduction no later than Oct. 15, 2016, the FHFA said.  Caveat Emptor.

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