Fannie/Freddie: Come Get Your Loan Modification & Pay For Life

The Fonie & Fraudie loan modification push is on.  They are pushing some of the highest leverage, exotic loan programs ever created. These loan mods make Pay Option ARMs look conservative. Why in the world do they think they are helping people by locking them into long-term, upside down financing that is orders of magnitude more exotic than the loan on which they are currently in default. These mods are even more aggressive than the FDIC’s (IndyMac).

This is an absolute disaster. I have written volumes on these terrible loan modifications and now this great experiment finally begins.  The story below should make you cringe if you are a homeowner or someone looking to buy or sell.  If this is widely accepted, the  implications are unknowable.  Coming to mind right away is permanent loss of a large portion of the US consumer base due to the massive leverage this program requires; and wide scale new loan defaults from home owners looking for relief due to macro economic worries that may not really need it. This will not end well.

Home owners!  Accepting this ’solution’ means:

• you acknowledge the full debt regardless of the value of the home
• waive all rights to fraudulent or predatory lending claims in the future
• turn your loan into a full recourse loan that could follow you for life even if you chose foreclosure down the road
• in most cases you remain an underwater, full-leveraged, renter for the rest of your life
• at 38% housing debt-to-income ratio plus all other debts, you will save no money

If widely accepted by home owners this will ruin the American consumer and make housing a dead asset class for decades. If you are in a serious negative equity position when signing these forms when most are, remember that you will:

• never be able to sell your home
• never be able to buy a new home
• never be able to rent your home due to owner occupant provisions
• be responsible for the full loan amount even if the value of your home keeps dropping for the next 10-years.

The 38% debt-to-income ratio on top of all of your other debt means you will save no money and live hand to mouth to keep this underwater roof over your head.

For those of you who do not care about being underwater in your home but wanted a lower payment rate, this is your green light to default. Your new terms are outlined below.

In my opinion, many of those who qualify for this plan would be better served to walk away, which is precisely the reason they rolled this out. Please, please consult your financial adviser before doing anything of this sort.

MORTGAGE DAILY FANNIE/FREDDIE LOAN MOD STORY HIGHLIGHTS

December 16, 2008

Streamlined Conforming Modifications Go Live

Fannie, Freddie release streamlined modification program guidelines

By MortgageDaily.com staff

-Fannie Mae and Freddie Mac have released details on the recently unveiled streamline modification program for conforming borrowers.

-All approved servicers are eligible for the streamlined program.

-The modifications temporarily run for three months on a trial basis then become permanent if the payments are kept current during the trial period.

-Qualified borrowers cannot be in litigation, in bankruptcy or on an existing workout plan and must be at least three months delinquent or in foreclosure on their owner-occupied first mortgages - including jumbo loans.

-the loan-to-value on a mark-to-market basis must be at least 90 percent. (EVERYONE UNDER 90% CAN GO THROUGH THE FORECLOSURE PROCESS WITH LITTLE LOSS TO THE GSE’S)

-Broker price opinions are acceptable for determining the current value, though automated valuation models are unacceptable. (BROKER PRICE OPINIONS ARE VERY EASILY MANIPULATED)

-Freddie noted that subordinate liens may be left outstanding and cannot be considered in the LTV calculation. (THIS MEANS BORROWER REMAINS EVEN MORE UNDERWATER)

-Streamlined modifications require a recent paystub and verbal income verification to determine that the proposed payment, including escrow, doesn’t exceed 38 percent of gross monthly income. (THIS MEANS 38% OF GROSS INCOME IS BEING USED FOR HOUSING DEBT ONLY. THIS IS MORE EXOTIC THAN MOST LOANS DURING THE BUBBLE YEARS)

-Under the plan, accrued interest, out-of-pocket escrow advances and costs must be capitalized. If this causes the payment ratio to exceed 38 percent, then the lender can extend the term of the loan to 480 months. (40 & 50-YEAR LOANS WERE JUST COMING IN FASHION AT THE END OF THE BUBBLE)

-If the ratio still exceeds 38 percent, then the interest rate can be reduced in 0.125 percent increments until the 38 percent ratio is reached.

-The lowest acceptable rate is 3.0 percent. (THIS IS A TEASER RATE JUST LIKE DURING THE BUBBLE YEARS)

-Rates reduced to below the current market rate as reported in Freddie’s Weekly Primary Mortgage Market Survey will only be in effect for five years then increased one percent annually until the market rate as of the modification date has been reached. (THEN THE RATE INCREASES EACH YEAR)

-If the extended term and lowered rate fail to reduce the payment ratio to 38 percent, then principal forebearance can be used to bring down the ratio. The deferred principal is interest free and due in full either at the loan’s maturity or the property’s sale. (THIS MEANS A HUGE BALLOON PAYMENT IS DUE IS YOU EVER CAN SELL)

-Principal write-downs and principal forgiveness are prohibited. (THIS IS WHY THIS PROGRAM WILL FAIL ON ALL FRONTS)

-Freddie said the program was effective yesterday for mortgage originated on or before Jan. 1, 2008.

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Comment by jlounsbury59

2008-12-18 19:20:38

Wow!

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