Federal housing regulators took a significant step on Wednesday toward helping borrowers who are falling behind on their mortgage payments — a move that will help more people but also introduce new risks that some homeowners could deliberately stop paying in order to become eligible for assistance.
The Federal Housing Finance Agency, which oversees mortgage finance giants Fannie Mae and Freddie Mac, announced that borrowers who are more than 90 days late on their mortgages will become automatically eligible for a modification to the terms of the home loan. The goal is to reduce monthly payments.
In the past, to be eligible for a mortgage modification, borrowers had to provide documentation they had a financial hardship. They will no longer be required to do so — though providing such documentation will make borrowers eligible for more substantial monthly savings.
“This new option gives delinquent borrowers another path to avoid foreclosure,” said Edward DeMarco, the acting director of FHFA. “We will still encourage such borrowers to provide documentation to support other modification options that would likely result in additional borrower savings.”
The program is only available to loans owned or guaranteed by Fannie and Freddie, which have been government-backed and controlled since late 2008. The relief would come in the form of a reduced interest rate, extended timeline for payments, or other measures.
A borrower would have to meet three consequence payments at the lower level before the modification would become finalized.
Some analysts worried that the new program could encourage borrowers to deliberately miss payments in order to become eligible for the program.
“The primary issue is whether this will encourage borrowers to strategically default on their mortgage in order to get the modification. This risk exists because the new program does not require the borrower to demonstrate financial hardship,” Jaret Seiberg, an analyst with Gugenheim Partners, wrote Wednesday. “
FHFA said Fannie and Freddie would use existing “screening measures to prevent strategic defaulters.”