New federal program for struggling borrowers launches July 1

June 24, 2013

In this commentary, Dwyer, the CEO of a title insurance firm in Connecticut, writes about a new federal program which he says could help homeowners in distressed properties.

Millions of struggling homeowners, including many of the 10 million who are underwater, will have renewed hope when a new, more accessible mortgage modification program launches on July 1.

The Federal Housing Finance Agency (FHFA) aims to help more Americans keep their homes by allowing borrowers to change the terms of their mortgages through the new Streamlined Modification Initiative (SMI). The nationwide program will require mortgage lenders dealing with loans backed or owned by Freddie Mac and Fannie Mae to offer eligible borrowers a less cumbersome way to lower their payments by modifying their loans. Many Americans could have more manageable monthly payments as a result of the program.

The FHFA says that by enacting this initiative, borrowers whose mortgages are modified should on average save 30 percent of their monthly mortgage payments, though the savings will be different on a case-by-case basis. Specifically, the SMI provides borrowers a modification offer consisting of a fixed interest rate, set at equal-to or lower-than the borrower’s current interest rate based on 30-year mortgage rates, but with the payment terms extended to 40 years. In addition, qualified underwater borrowers may be able to pay no interest on some of the principal of the loan above their home’s appraised value. This principal forbearance is limited to up to 30 percent of the unpaid loan balance. For many Americans, this math works out to tremendous savings.

SMI is not the government’s first attempt to help borrowers in danger of foreclosure. Other initiatives, such as the Home Affordable Modification Program (HAMP) offer different solutions for Americans in financial distress, and could actually save borrowers more than the SMI program.

However, previous programs grossly under performed in terms of the number of people actually assisted. One significant hurdle cited by many as a contributing factor to low participation was the necessity for borrowers applying to such programs to provide proof of hardship or financial struggles. The extensive paperwork, burden of proof on the borrower and stringent guidelines were obstacles that prevented many qualified people — people who were indeed facing financial hardship — from qualifying and taking advantage of previous beneficial initiatives such as HAMP.

The Streamlined Modification Initiative requires no such red tape. Pundits have hailed the elimination of financial or hardship documentation as the key feature of the SMI program. The FHFA says that this streamlining dramatically increases the likelihood for broader adoption of modifications.

To qualify for the SMI, borrowers will need to have a mortgage at least a year old, be 90 days to 24 months delinquent on their payments and have a loan-to-value ratio that is equal to or greater than 80 percent.

As an example of this minimum loan-to-value ratio, a home appraised at $100,000 would qualify if the borrower had an unpaid mortgage balance of at least $80,000. However, any loans that have been modified more than twice in the past are ineligible for this program.

Once the program begins, borrowers will be able to accept a three-month trial period for their modified mortgages. Importantly, the burden of notification is on the mortgage servicer; all the borrower has to do to enter the program is send in the modified monthly payments during a three-month trial period. These payments would be lower than previous monthly payments. Assuming the borrower makes timely payments in the new amount for the first three months, the temporarily modified mortgage would become permanent.

Much like other government modification programs, the SMI plan aims to assist struggling homeowners. An average reduction of 30 percent in monthly payments should, in theory, result in many more homeowners continuing to live in the homes they have worked so hard to afford and maintain. This would be good news for everyone.

Other government mortgage modification programs have received criticism for the low participation and uncertain effectiveness at averting foreclosure. Whether the SMI will be more effective than previous programs still remains to be seen. Other programs may have provided more aggressive relief, but SMI’s low barrier to participation should greatly broaden the number of people assisted.

Millions of Americans have struggled to make their mortgage payments since the housing crisis began in 2008. Thanks to the SMI, on July 1, many homeowners will have reason to hope that they can continue to live the American dream of owning their own homes.

Timothy M. Dwyer is founder and CEO of Entitle Direct Group, a direct-to-consumer title insurance firm in Stamford, Conn. He can be reached at tdwyer@entitledirect.com.

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