Fannie Mae, Freddie Mac lower some hurdles to payment relief

Two major government-related mortgage investors, at the direction of their regulator and conservator, are updating a key vehicle that helps seriously delinquent borrowers, who have long-term income reductions and distressed mortgages, to afford monthly payments.

The upcoming changes in the Flex Modification program that government-sponsored enterprises Freddie Mac and Fannie Mae offer to qualified borrowers respond to lessons learned from the pandemic and the market’s high home-equity levels and financing costs.

The updates set for later this year will give struggling borrowers “a meaningful mortgage payment reduction in the current environment of elevated interest rates and home prices,” Federal Housing Finance Agency Director Sandra Thompson said in a press release.

One prominent change of many planned for the mods, which make a series of adjustments to loan terms within certain parameters, is to expand a market-to-market loan-to-value ratio limit that determines access to both lower rates and the ability to add unpaid amounts to a mortgage.

(Higher LTVs were originally emphasized as a parameter for assistance when modifications became more widespread and standardized amid the Great Recession, a period in which, unlike today, there was heavy equity depletion.)

Currently only borrowers with post-modification mark-to-market LTVs of 80% can achieve certain reductions of their contractual rate or capitalization of arrearages, but those above 50% will be able to do so after the latest changes go into effect.

The change partially restores some of the temporary leeway instituted during the transition out of pandemic forbearance, when the COVID-19 version of the Flex Mod applied potential rate reduction regardless of loan-to-value ratio. That was later retired as COVID-19 policies ended.

Overall, foreclosure prevention programs appear to have been effective in containing distress based on Freddie and Fannie’s serious delinquency rates, which have been lower than they were prior to the pandemic.

Just 0.51% single-family loans had payments three months late or were in foreclosure as of April, compared to 0.52% the previous month and 0.61% a year ago.Fannie Mae’s number for April was the same as Freddie’s and compared to 0.53% in March and 0.58% a year earlier.

The latest changes may help some within that small percentage of serious delinquent borrowers return to paying status.

In addition to providing some more leeway around the LTV limit, Freddie, Fannie and their oversight agency also are adjusting term extensions, which have not been subject to limitations based on equity levels.

Currently, term extensions are for a set 40 years. Shorter terms will be possible in the future if the loan can achieve the program’s 20% principal-and-interest payment reduction target without going out 40 years. (There also is a target limit to forbearance.)

This adjustment is anticipated to achieve lower payments more in line with the targeted range. Loans with a 10% reduction or less have had less favorable reperformance rates. Reductions above 20% have made little difference in whether a loan reperforms.

The Flex Mod changes are set to go into effect on Dec. 1.

In addition to the aforementioned criteria that generally pertain to the fixed rate mortgages that dominate the market, Flex Mods have several other parameters that may limit their applicability to borrowers. They also have some nuances where adjustable-rate loans are concerned.

One of the notable limitations is that more recent borrowers and certain lenders don’t have access to Flex Mod assistance, said Taylor Stork, president of the Community Home Lenders of America and chief operating officer of Developer’s Mortgage Company. A loan must be at least a year old to qualify for a Flex Mod.

Independent mortgage bankers who originate and sell loans servicing-released have certain buyback responsibilities for loans that default relatively soon after origination, Stork said. 

“This is not going to fit in newer borrowers because of the traditional early-payment default repurchase model in the industry, and it does not add any value to non-servicing IMBs that originate,” said Stork, commenting on the upcoming Flex Mod enhancements.

The issue is part of broader, ongoing discussions the industry and the GSEs are having about whether there might be more that can be done to provide alternatives to loan repurchases that can impose a heavy financial burden on mortgage companies.