Blomquist continues,
This sounds like a good way to reduce foreclosures and prop up home prices, but
as we will shortly see, the proposed program is oddly risky and likely to
encourage additional defaults.
According to the Federal
Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac will offer “a new,
simplified loan modification initiative” to borrowers who are at least 90 days
late with their mortgage payments. Modifications can include a lower rate, a
loan term stretched to 40 years and principal forbearance in some cases.
“The loan,” says FHFA,
“must be owned or guaranteed by Fannie Mae or Freddie Mac. Homeowners must be
90 days to 24 months delinquent, and have a first-lien mortgage that is at
least 12 months old with a loan-to-value ratio equal to or greater than 80
percent. Loans that have been modified at least two times previously are not
eligible.”
The program is open to
borrowers who have already modified their loans once, perhaps a few years ago
when rates were higher. This, at least, is a good idea.
So according to
Blomquist, what’s the big difference between the new program and the
modifications offered previously? No-Doc Modifications.
FHFA says the “key
difference is that borrowers will not be required to document their hardship or
financial situation, but will be able to accept a Streamlined Modification
Offer by simply making the trial period payments and agreeing to the terms of
the modification.”
According to Blomquist,
The new government initiative is in some ways commendable: We surely want fewer
people foreclosed and if there’s a way to modify mortgages that makes financial
sense for both lenders and borrowers then we should take a look. Unfortunately,
the FHFA program misses the mark. It is understandable and even laudable to
give troubled homeowners the chance to prove themselves worthy of a loan
modification by making three trial payments. But eliminating the requirement
for these homeowners to show they have a financial hardship before entering the
trial modification period creates a moral hazard.
Those who can afford to
make their current mortgage payment will be rewarded if they strategically
default, in which case they can qualify for a program in which their new
monthly payment is lower. The end result: Fannie and Freddie—and ultimately
taxpayers—get a lower rate of return on a loan without any evidence that
lowering that rate of return was necessary.
The reason given for
eliminating the hardship documentation requirement: it “eliminates the
administrative barriers with document collection and evaluation.”
Blomquist says it,
Sounds more like a rationalization for cutting corners rather than a solid
defense of doing what is right for the American taxpayer.
So, aren’t no doc loans
how we got into this situation in the first place? Thank you to Mr. Blomquist
for so eloquently saying what needs to be said
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