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Loss Mitigation


Servicing Alignment Initiative

FHFA, jointly with the Enterprises, announced the Servicing Alignment Initiative (SAI) in April 2011 with an effective date of October 1, 2011.  The objective of SAI was to develop consistent servicing policies that would help servicers to do a better job of resolving delinquencies in a consistent, efficient, and expeditious manner with the goal of keeping struggling borrowers in their homes whenever possible while minimizing losses to the Enterprises and taxpayers.  Under SAI, the Enterprises developed a broad suite of aligned loss mitigation programs that streamline the delivery of loss mitigation solutions to borrowers.  The success of these efforts is tracked in FHFA's quarterly Foreclosure Prevention Report which documents the Enterprises’ performance in foreclosure prevention actions for borrowers.  The loss mitigation solutions outlined in the reports are currently being re-evaluated and redesigned to address a more stable economic environment. 

 

Future of Loss Mitigation

On July 25, 2016 FHFA, the U.S. Department of the Treasury, and the U.S. Department of Housing and Urban Development (HUD) issued a joint white paper entitled, Guiding Principles for the Future of Loss Mitigation: How the Lessons Learned from the Financial Crisis can Influence the Path Forward.  The white paper details five key principles for the future of loss mitigation.  The key principles set forth in the white paper are:

Accessibility:
Providing a simple process for homeowners to seek assistance.
Affordability:
Providing modification terms that result in meaningful payment relief.
Sustainability:
Offering solutions that resolve the delinquency for the long-term.
Transparency:
Ensuring that the process is clear and understandable.
Accountability:
Ensuring that there is an appropriate level of oversight.

In 2016, the Enterprises developed the Flex Modification, which is described below, with these key principles in mind.  In 2017, FHFA required the Enterprises to evaluate possible changes to the existing loss mitigation options for borrowers that include repayment plans, forbearance plans, short sales, and deeds-in-lieu of foreclosure, to reflect the key principles developed for the future of loss mitigation.


Current Suite of Loss Mitigation Programs:

The suite of programs detailed below encompasses the core loss mitigation programs currently offered by the Enterprises. This is not meant to be a comprehensive list of every program an Enterprise may offer. The loss mitigation programs listed are solely for Enterprise loans, and different loan options are available for government insured loans (e.g., FHA-insured loans) or for loans that are not owned or guaranteed by the Enterprises. Not all borrowers will be eligible for a particular program, and other terms or conditions may apply.

Repayment Plans

In a repayment plan, past due amounts are added on to the borrower’s mortgage payment to be repaid over several months in order to bring the mortgage current.  Repayment plans allow a borrower time to catch up on late payments without having to come up with a lump sum.


Forbearance Plans

Forbearance plans allow a borrower to make reduced mortgage payments or no mortgage payments for a specific period of time.  The borrower gains time to improve their financial situation and possibly qualify for a better option than would be available at that time.  Forbearance may be granted for borrowers in temporary or short-term financial difficulty.  At the conclusion of the forbearance period the borrower is required to pay any missed payments or amounts, which is generally achieved with a repayment plan or modification.


Standard Modification

Standard Modification has the following features:

  • Capitalize arrearages (such as missed payments)
  • Reduction of interest rate to current rate for borrowers with mark-to-market loan-to-value (MTMLTV) above or equal to 80%
  • Term extension to 40 years, from the modification date
  • Forbear principal to MTMLTV of 115%, with a maximum of 30% of the post modification unpaid principal balance (UPB)

Borrowers need to submit documentation to be considered for Standard Modification, and they are also required to sign a modification agreement and to make trial payments.

Streamlined Modification

Streamlined Modification uses the same terms as Standard Modification and is available to eligible borrowers who are at least 90 days delinquent.  Borrowers are proactively offered a modification under this program and do not need to submit documentation, though the borrower does need to sign a modification agreement and make trial payments.


Flex Modification

In 2016, FHFA required the Enterprises to develop an aligned post-crisis loan modification program that built on lessons learned from the crisis-era modification programs.  The aligned effort resulted in the Flex Modification, announced in December 2016.  Flex Modification will replace Standard and Streamlined Modifications.  Some servicers have already started to offer Flex Modification, and all servicers are required to implement Flex Modification by October 1, 2017.

Flex Modification has terms that are similar to Standard Modification and Streamlined Modification:

  • Capitalize arrearages (such as missed payments)
  • Reduction of interest rate to current rate for borrowers with mark-to-market loan-to-value (MTMLTV) above or equal to 80%
  • Term extension to 40 years from the modification date
  • Forbear principal if needed to reduce the MTMLTV to 100%, with a maximum forbearance of 30% of the post modification UPB
  • For borrowers who are less than 90 days past due, if the borrower has not achieved a 20% payment reduction and 40% Housing expense-to-Income Ratio (HTI), forbear additional principal until those targets are met, down to 80% MTMLTV, with a maximum of 30% of the post modification UPB
  • For borrowers who are 90 days or more past due, Flex Mod provides additional forbearance if needed to meet a target of a 20% payment reduction
Similar to Streamlined Modification, Flex Modification requires servicers to offer a modification to eligible borrowers who are at least 90 days delinquent, without requiring a borrower to submit any documentation.

Short Sale

Short Sale is a foreclosure alternative where a borrower sells the home for less than the balance remaining on the mortgage.  The borrower sells the home and pays off a portion of the mortgage balance with the proceeds.  The borrower may be required to pay off the remaining mortgage balance.  A short sale allows a borrower to transition out of the home without going through foreclosure.  In some cases, relocation assistance may be available.


Deed-in-Lieu

Deed-in-Lieu is a foreclosure alternative where a borrower voluntarily transfers the ownership of the property to the owner of the mortgage in exchange for a release from the mortgage loan and payments.  The borrower may be required to pay off the remaining mortgage balance if the value of the property is lower than the amount owed.  A deed-in-lieu allows the borrower to transition out of the home without going through foreclosure.  In some cases, borrowers may be eligible for relocation assistance.


Expired Loss Mitigation Program(s)

HAMP

Announced in February 2009, the Making Home Affordable (MHA) program created foreclosure alternatives for homeowners impacted by the financial crisis.  The Home Affordable Modification Program (HAMP) was the first and largest program implemented under MHA.  HAMP modifications strived to achieve an affordable monthly mortgage payment of no more than 31% of the borrower’s gross monthly income through a combination of interest rate reduction, term extension, and principal forbearance.  To be eligible for HAMP, a loan must have been originated on or before January 1, 2009 and borrowers must have submitted an application by December 30, 2016.

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