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How the FHFA Principal Reduction Modification Program Works
In April 2016, the FHFA (Federal Housing Finance Agency) announced a new principal reduction modification program for underwater mortgage borrowers who are behind on their payments. The program is designed to help delinquent borrowers become current on their mortgage, reduce their mortgage payment and avoid foreclosure. Borrowers who are eligible for the Principal Reduction Modification Program will be notified in writing by their mortgage services (the company to which you make your mortgage payment) by October 15, 2016. Key features of the program include:
- Capitalizing any outstanding arrearages which means adding any past due payments to your mortgage balance. So instead of continuing to owe money for past due payments, that amount is added to your mortgage balance so you start fresh
- Reduction in mortgage rate to the current market rate. A lower interest rate means a lower monthly payment
- The mortgage term is extended to 40 years. Increasing the mortgage length reduces the required monthly payment
- Forbearance of principal and arrearages up to a certain amount. This feature means that a portion of the mortgage balance and unpaid payments is initially deferred until the end of the mortgage (forbearance). In short, with forbearance, the borrower does not need to make any principal or interest payments on the amount being forbeared until the end of the mortgage which reduces the mortgage payment. For example, if $10,000 of a $100,000 mortgage is forbeared then the borrower’s monthly payment is based on a $90,000 loan amount, but the borrower still owes the $10,000 at the end of the loan
- The amount of forbearance is forgiven if the borrower meets certain requirements. If the borrower accepts the terms of the loan modification according to the program and makes three on-time payments (at the new, lower payment) then the amount of principal that has been forbeared will be forgiven which means the borrower is not required to pay that money back. For example, if $10,000 of a $100,000 mortgage is initially forbeared and the borrower makes three on-time mortgage payments and agrees to the terms of the loan modification, then the $10,000 is forgiven, the borrower is not required to repay that money and the new loan balance is $90,000
The amount of the mortgage reduction (forbeared or forgiven) depends on multiple factors including the value of the property and the outstanding mortgage balance plus any past due amounts. Based on program guidelines, the mortgage balance is typically reduced to a level such that the new loan-to-value (LTV) ratio equals 115%. LTV ratio equals the ratio of the mortgage balance to the property value. For example, a property valued at $100,000 with a $115,000 mortgage amount has an LTV of 115% ($115,000 (mortgage amount) / $100,000 (property value) = 115%). For borrowers that are significantly underwater (the mortgage balance greatly exceeds the property value) the program allows for a maximum principal reduction of 30%.
Mortgage servicers have until July 15, 2016 to notify borrowers who are potentially eligible for the program about a Streamlined Modification, which provides borrowers relief while their eligibility is reviewed and the program is implemented. The Streamlined Modification stops foreclosure but does not guarantee principal forgiveness.
If the borrower is approved as eligible for the Principal Reduction Modification Program, then the amount of principal forbearance provided under the Streamlined Modification is forgiven. If the borrower is determined to be ineligible for the program, then he or she will continue to benefit from the payment relief provided by the Streamlined Modification due to a lower interest rate, longer mortgage term and principal forbearance but will not receive any principal forgiveness.
Mortgage servicers have until October 15, 2016 to contact borrowers regarding the FHFA Principal Reduction Modification Program and until December 31, 2016 to inform them that they are eligible for the principal forgiveness component of the program.
Use the FREEandCLEAR Lender Directory to search for twenty-five mortgage programs including multiple refinance assistance programs that are currently available to borrowers.
Mortgages must meet certain requirements to to be eligible for the Principal Reduction Modification Program including the following:
- Borrowers must have a mortgage that is owned or guaranteed by Fannie Mae or Freddie Mac. The entity that owns or guarantees your mortgage may be different than your mortgage servicer, or the company to which you make your monthly payment.
- Use the LOAN LOOKUP TOOL to determine if Fannie Mae or Freddie Mac own or guarantee your mortgage
- Borrowers must be at least 90 days delinquent on their mortgage as of March 1, 2016. This means that if you stop paying your mortgage now you will not be eligible for the program, even if you are struggling to make your payment
- The mortgage must have an unpaid principal balance of $250,000 or less as of March 1, 2016 and the loan-to-value (LTV) ratio, including any past due mortgage amounts, must be greater than 115% when the borrower applies for the program. This means that your loan balance is greater than the value of your property, which also means you are underwater on your mortgage.
- The property must be owner-occupied. Investment properties are not eligible
Eligible borrowers who enter into a modification with a first trial payment date between May 1, 2016 and December 1, 2016 are eligible to have their principal forbearance converted to forgiveness.
Borrowers should contact their mortgage servicer to determine if they are eligible for the program. Borrowers can also contact their local HUD-approved housing agency to learn more about the FHFA Principal Reduction Modification Program and other mortgage assistance programs.
Related FREEandCLEAR Resources
Sources
"Principal Reduction Modification." FHFA. Federal Housing Finance Agency, 2016. Web.
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