Homeowners facing foreclosure whose mortgage loans are insured by Fannie Mae or Freddie Mac have not been eligible for principal reductions, which is one of the best tools for making mortgage payments more affordable, when modifying their loans. That may be changing soon.
Fannie Mae and Freddie Mac are regulated by the Federal Housing Finance Agency, or FHFA, which has indicated that it is considering allowing principal reductions.
However there have been conflicting reports on the FHFA's intention. The Wall Street Journal reported in March that Fannie and Freddie principal reductions were going to happen. But that same day FHFA's director Mel Watt said that no decision had been made.
Recently some people in high places have asked the FHFA to allow principal reductions. According to housingwire.com, New York's attorney general Eric Schneiderman wrote a letter to director Watt saying that principal reducing loan modifications “should be deployed broadly and quickly to homeowners in desperate need of this relief from the continuing damage caused by the housing crisis.”
Schneiderman's letter continues:
“While virtually all of the large commercial single family lenders now include principal reduction in their foreclose mitigation options for struggling borrowers, both Fannie Mae and Freddie Mac continue to deny this badly needed relief to consumers…
It is far more profitable for any financial institution to hold a portfolio of performing $200,000 mortgages that keeps families in their homes than a portfolio of non-performing $250,000 mortgages headed toward default.
I know that you share my commitment to helping families who were victimized by this man-made crisis, and to making sure struggling families are given every opportunity to remain in their homes and their communities…
I am encouraged that FHFA recognizes the need to change its policy. I urge you to move swiftly to create and implement a principal reduction loan modification program and to ensure that this relief is provided to as many homeowners as possible, as it is the surest way to help the tens of thousands of families, both in New York State and throughout the country, who desperately need this relief.”
Notice that the attorney general says that most banks already allow principal reducing loan modifications. That's an important point. Unless your loan is with Fannie or Freddie, you don't have to hope and wait for a decision from the FHFA. The possibility is already open to you.
If, when, and how the FHFA will change its policy to allow for principal reducing loan modifications remains to be seen. If you're in need of help to save your home, no matter what type of loan you have, don't wait for a decision from a federal agency that may or may not come.
The loan modifications that are available now can still help you keep your home. Even without a principal reduction a loan modification can still significantly lower your monthly payment by stretching the loan out over as many as 40 years and lowering the interest rate to 2-4%.
If you're in need of a loan modification to avoid foreclosure, you have plenty of company. There are currently a million homeowners in some stage of the foreclosure process and many more are one financial hardship away from joining them. You may not hear as much about it nowadays, but the housing crisis is far from over. Borrowers continue to struggle with negative equity in their home, reduced income, and uncertainty on multiple fronts.
Loan modifications are the only hope many borrowers have for saving their home, but they often have a terrible experience trying to obtain one. As many as nine out of ten people who apply on their own are denied, which is why it's best to have an experienced professional assist you. With good help you have better odds of getting what you want under the best terms, and you'll have the peace of mind knowing that your case is in good hands and everything possible is being done to help you.
*Since publishing this blog, the Fannie Mae Principal Reduction Modification Program has been announced, see the update to this blog here.