Get Mortgage Relief at the Yellow Light Rather Than Red

By Kenneth R. Harney
Saturday, December 20, 2008

Here's some good news for homeowners facing tough financial times: You no longer have to miss two to three months of payments before your mortgage company can modify the loan terms you can no longer afford.

Starting immediately, Fannie Mae, the mortgage giant that has an estimated 18 million home loans in its portfolio or in mortgage bond pools it guarantees, will allow borrowers who face imminent difficulties to request "early workout" loan alterations, even if they have never been late.

Fannie's policy change has the potential to help thousands of people who are losing jobs or facing layoffs as the recession crunches onward. Most lenders and loan servicers have declined to intervene in mortgage problems until borrowers are 60 to 90 days late. At that point, the lenders may try to work out solutions if possible -- through rescheduling of back payments or extending the loan term, among other techniques.

Under Fannie Mae's revised approach, servicers of the company's loans nationwide will be required to inform borrowers that if they are "reasonably" certain that changes in their income will cause them to miss mortgage payments, they might qualify for an advance loan modification -- before they fall behind.

Borrowers who qualify will enter into a trial period of reduced payments, usually for four months. If they make payments on time during the trial, the modified mortgage terms could then be made permanent.

For example, say your spouse loses a part-time source of income, and suddenly you're short $400 a month needed to make your $2,000 mortgage payment. In the past, if you called your loan servicer, you would likely be told that rules prohibit any help to you until you have become delinquent by several months.

But by that time, you might be thousands of dollars in the hole, racking up big late-payment penalties and well along in the process of wrecking your credit score.

Under the new early workout concept, by contrast, Fannie's servicers can tell you upfront: We'll try lowering your monthly payments to accommodate the $400 in missing income. If you're current on the lowered payments after a four-month trial, and your income has not rebounded, we'll make the change permanent.

Officials said servicers will examine each case individually, checking income, credit reports and other documentation to ensure that borrowers aren't faking income shortages just to get a lower payment.

Fannie's new loan modification program puts the company in sync with a number of other large mortgage institutions that have begun reaching out to borrowers facing economic strains before they end up in serious delinquency or foreclosure.

For instance, Jamie Dimon, chairman and chief executive of J.P. Morgan Chase, says he expects his company to identify and work with as many as 400,000 customers who may be in danger of missing future payments. Bank of America recently announced a similar effort.

Freddie Mac, which has 12 million loan customers either in its portfolio or in mortgage bond pools it guarantees, has "for years" permitted its servicers to negotiate early modifications in some circumstances, according to spokesman Brad German, although the company has not aggressively publicized it to borrowers.

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