New mortgage program offers lower payments

Story originally appeared on USA Today.

The federal government on Wednesday announced a new loan modification program designed to help many more struggling homeowners than previous initiatives by requiring no documentation of income or financial hardship.

Under the Streamlined Modification Initiative, borrowers with loans backed by mortgage finance giants Fannie Mae and Freddie Mac must be at least 90 days delinquent on their mortgages and and make three trial payments on time. The initiative is being launched by the Federal Housing Finance Agency, which regulates Fannie and Freddie.

"This new option gives delinquent borrowers another path to avoid foreclosure," says FHFA Acting Director Edward DeMarco.

Other programs to aid struggling homeowners, such as the Home Affordable Modification Program (HAMP), required borrowers to provide financial, income and hardship documentation. That created bureaucratic bottlenecks for many mortgage servicers, which limited the effectiveness of the programs.

The new initiative will begin July 1, 2013, and end Aug 1, 2015. By July 1, mortgage servicers must identify delinquent borrowers and send them a letter offering the modification.

To reduce their monthly payments, borrowers will get a new interest rate that's equal to or below their current rates, based on the average of 30-year fixed mortgages, and the term will be extended to 40 years. Also, borrowers who owe more than their homes are worth will pay no interest on up to 30% of their unpaid balance. Borrowers, on average, are expected to reduce their monthly payments by 30%.

FHFA notes that in most cases, borrowers who provide proof of income and financial hardship can receive a more affordable monthly payment through the HAMP program.

To be eligible for the new program, homeowners must be 90 days to 24 months delinquent on their loans. They also must have a first-lien mortgage that's at least 12 months old, and the amount they owe on their mortgages must be at least 80% of their home value.

FHFA says it has screening measures in place to ensure that the new program isn't exploited by strategic defaulters — people who stop paying their loans to get a modification.

FHFA officials have not estimated the number of borrowers they expect to participate. But in a pilot program, 70% of those offered the opportunity took part in the trial, and 50% of the latter group received a permanent loan modification.

Ira Rheingold, executive director of the National Association of Consumer Advocates, says the program "is not a bad idea" because it addresses mortgage servicers' paperwork snafus.

"It's a solution for some people who just want a roof over their head and don't want to lose their home," he says.

But it will not be the best option for homeowners who could save more money through other programs that require documentation, Rheingold says.

More critically, he says, the program doesn't lower the principal owed by borrowers to give them more equity in their homes. FHFA has been unwilling to do that.

About one in five homeowners owe more on their mortgages than their homes are worth. That's been an impediment to the revival of the housing market and the economy.

"Unless they address principal reduction, it's not good enough," Rheingold says.

Fannie and Freddie helped 130,000 homeowners avoid foreclosure in the fourth quarter, pushing their total such successes last year to 540,000, according to FHFA. Since 2008, they have helped 2.7 million borrowers avoid foreclosure, including 1.3 million through loan modifications and the remainder through repayment and forbearance plans, short sales and other strategies.