Homeowners in financial trouble no longer need to miss two to three months of payments before their mortgage companies can modify their unaffordable loan terms.
By Kenneth R. Harney December 21, 2008
Reporting from Washington -- 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 firm can modify your unaffordable loan terms. Fannie Mae, the mortgage giant with an estimated 18 million home loans in its portfolio or in mortgage bond pools it guarantees, now will allow borrowers who face financial difficulties to request "early workout" loan alterations, even if they've never been late.
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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 traditionally have declined to intervene in mortgage problems until borrowers are 60 to 90 days late. So-called loss mitigation staffs may then try to work out solutions through techniques such as rescheduling back payments or extending the loan term.Under Fannie Mae's revised approach, servicers of the company's loans 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 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 probably would 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 in the process of wrecking your credit scores.Under the early workout concept, Fannie's servicers can now 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 situation has not rebounded, we'll make the change permanent.Officials said servicers would examine the facts in each case individually, checking income, credit reports and other documentation to ensure that borrowers weren't faking income shortages just to get a lower payment.Fannie's new loan modification program puts the company in sync with other large mortgage institutions that are reaching out to borrowers facing economic strains before they end up in serious delinquency or foreclosure.For instance, Jamie Dimon, JPMorgan Chase's chairman and chief executive, 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 has 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, spokesman Brad German said, although Freddie has not aggressively publicized the program to borrowers.With the addition of Fannie Mae, the vast majority of major players in the mortgage market now say they offer some form of early intervention for consumers heading for defaults. But there's a big unknown here: If your servicer modifies the terms of your loan, will you stay out of trouble? Or might you fall behind again?The jury is still out. On the one hand, some recent federal data suggest that more than half -- 53% -- of modified loans end up in re-defaults within six months. Modification advocates such as Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., contend that changes to loan terms that go deep enough to meaningfully deal with borrowers' ongoing financial problems succeed at far higher rates.What should you do if you see financial trouble on the horizon that could push you into serious delinquency? Immediately contact your servicer, and if you find out your loan is owned by Fannie Mae, Freddie Mac or another major lender, request an early workout.Before foreclosures started going off the charts, substantive help in advance would have been almost inconceivable. Now it's part of servicers' marching orders.Kenneth R. Harney is a syndicated columnist distributed by the Washington Post Writers Group.
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