Nine days ago, the government unveiled the Streamlined Modification mortgage program. Today, Fannie Mae and Freddie Mac announced they would simply stop foreclosures from November 26 to January 9.

The Streamlined Modification mortgage program is a simplified process for determining whether someone is eligible for a new loan. Instead of the standard cumbersome loan modification process, which is just like applying for a new loan and requires review of borrowers’ credit reports and tax returns, the new plan focuses on the borrower's income and ability to afford future payments. The program was scheduled to begin December 15, and applies only to mortgages owned or guaranteed by Fannie Mae and Freddie Mac. That’s approximately 50% of all home loans.

Major lenders, including Wells Fargo and Bank of America agreed to apply the same standards to their own home mortgage loans. See Lenders Hope Simpler Loan-Rework System Reaches More Borrowers,  published by the Washington Post, November 12. The Post quoted Faith Schwartz, head of Hope Now, an alliance of lenders, mortgage counselors and others in the industry, as saying: "This is a big step forward that will make it easier to modify loans for the most at-risk homeowners so they will be able to avoid foreclosure and stay in their homes."

But that was apparently not enough – the system for processing home loan restructuring cannot keep up with the crisis. To allow the processors to catch up, and to avoid tossing people out of their homes over the holidays, the mortgage giants announced today that they have ordered mortgage servicers and foreclosure attorneys to suspend foreclosure sales and evictions for certain properties. Freddie Mac alone expects to approve refinancing 84,000 home loans under the Streamlined Modification program, but that won’t begin to happen until December 15.

Still, the program cannot reach all homeowners facing foreclosure. Freddie Mac alone has 140,000 delinquent loans and expects to modify only 84,000 of those according to the MarketWatch report today.  A borrower who is 90 days delinquent will be eligible for a new loan with a payment that does not exceed 38 percent of his gross monthly income. To qualify, the homeowner must provide proof that he has suffered a hardship, such as losing a job, which made it impossible to keep up with payments. The terms of the borrower's loan then could be extended from 30 years to 40 years, and if that is not enough, the interest rate could be reduced to as low as 3 percent to make the payments more affordable. The homeowner could be subject to an interest rate increase later. If those options don't reduce payments enough, part of the principal owed on the loan could be deferred until the end of the loan term. In other words, there is no loan forgiveness, just attempts to make the payments affordable. At sale, the full amount of the principal and interest would be repaid.

The Streamlined Modification mortgage program also retains many of the practices that have frustrated other efforts to modify troubled loans. For example, it excludes borrowers who are current on their mortgages but face an interest rate increase that will make payments unaffordable. It also does not provide any new mechanism for reaching homeowners, who in about half of foreclosures have not talked to their lenders. And, it cannot help homeowners who find themselves with no income at all.

The government and mortgage giants Fannie Mae and Freddie Mac and clearly trying to stay above water until new systems for dealing with the financial crisis have time to work. Meanwhile, reducing the number of foreclosures coming onto the market could have a stabilizing effect on inventory and home prices at a time of the year when home buyers tend to be scarce, even in normal times.

There are foreclosed homes for sale in Flagstaff. If you want to buy a foreclosed home, give me a call and we'll talk about what makes sense for you as a home buyer.

Ann Heitland, Associate Broker

Team Heitland, RE/MAX Peak Properties

928.714.0001