Fannie Mae’s (and the Banks’) Incentive to Foreclose Rather than Modify Homeowners’ Mortgages
Fannie Mae seems to be as eager to foreclose on homeowners as the banks. But Fannie-Mae may be willing to take a three-month detour in "trial" modifications, as opposed to "permanent" modifications, before putting pressure on its servicers to resume the foreclosure process. Reason: each trial modification (of at least three months) results in bonuses to Fannie.
Fannie and Freddie Mac, as holders of more than 50% of all mortgages, and as virtually nationalized bankrupt entities, were supposedly designated to be the chief vehicles and examples of modifying mortgages (by reducing both principal and interest payments), so that more people can remain in their homes rather than face foreclosure.
To date they’ve failed in their supposed mandate. According to a report by the Congressional Oversight Committee:
The panel’s report says the government’s mortgage modification program has three key problems:
•The kinds of mortgages that will make up growing numbers of foreclosures exceed the program’s eligibility requirements.
•With a goal of modifying only 25,000 to 30,000 loans a week, fewer than half of the predicted foreclosures would be avoided. One in eight homes are currently in foreclosure or default and 250,000 additional foreclosures are initiated monthly.
•Many modifications so far are still in a three-month trial period. As of Sept. 1, only 1,711 homeowners had received permanent modifications under the federal program. And after five years, many will see higher payments.
"The result for many homeowners could be that foreclosure is delayed, not avoided," the report says.
Fannie Mae says it will begin fining loan servicers who take too long to complete foreclosures once it’s been determined that delinquent borrowers don’t qualify for a loan modification or other alternatives like short sales.
As indicated in the Oversights Committee report, the overwhelming number of loan modifications have been "trial" modifications, rather than "permanent" modifications.
Why have so few mortgages been permanently modified, nineteen months after HAMP was initiated?
Fannie Mae instructed companies that service loans it guarantees to allow modifications to borrowers who made payments during a trial period but did not meet all income document requirements under the initial terms.
On March 18, Fannie Mae issued Lender Letter 2010-04 instructing servicers how to resolve active trial modifications under the Home Affordable Modification Program (HAMP)…
Among the possible reasons: a) Some homeowners are not going to be able to finance their mortgages under any circumstances; b) The terms of HAMP and HAMP alternatives are still too onerous for many homeowners (particularly those that are "underwater"), and should be loosened up to allow more homeowners to qualify; c) Fannie-Mae doesn’t really have any incentive to go beyond the three-month trial period and aim for permanent modification, since it receives government bonuses (from Treasury)immediately after enrolling a homeowner in the trial program.
These incentives/bonuses were implicated as a main reason for the dearth of pemanent modifications by a Fannie Mae whistleblower:
Caroline Herron, a former Fannie vice president who returned to the mortgage giant in 2009 as a high-level consultant, claims that the homeowner-relief effort was marred by delays, missteps and executives preoccupied with their institution’s short-term financial interests.
“It appeared that Fannie Mae officers were focused on maximizing incentive payments available to Fannie Mae under various federal programs – even if this meant wasting taxpayer money and delaying the implementation of high-priority Treasury programs,” she claims in the lawsuit.
One issue inside Fannie was its push to put as many borrowers as possible into short-term trial modifications, at the expense, Herron maintains, of getting qualified borrowers into permanent modifications.
Herron charges that Fannie Mae continued in headlong pursuit of “trial mods” even though it knew many had little chance of becoming permanent. As late as September 2009, barely 1 percent of trial modifications had converted to permanent modifications by the end of their three-month trial, a Congressional oversight panel found. Nevertheless, Fannie preferred doing trials, Herron alleges, because it was eligible to receive incentive payments from the Treasury Department for trial modifications it booked before the end of 2009.
As of February 2010, 83 percent of the 1 million active modifications being handled by HAMP were trials rather than permanent arrangements. Barofsky, the special inspector general, criticized HAMP’s focus on trial modifications in a recent report.
“If HAMP ends up being a foreclosure mitigation program that merely delays foreclosures rather than preventing them, the program will be of questionable value, particularly in light of the huge investment of taxpayer funds,” Barofsky wrote. “A program that helps borrowers permanently avoid foreclosure is preferable (and far less wasteful of taxpayer dollars) to one that merely kicks the proverbial foreclosure can down the road.”
If Herron is to be believed, then we have Fannie-Mae having an incentive for short-term modifications, up to three months; but then pushing their servicers to foreclose as quickly as possible, in order to stem their losses and recoup whatever then can from foreclosure.
(And, not surprisingly, we have the big banks rooting for Fannie from the sidelines, because the banks still have no desire to reduce the principle on mortgages that they hold, rather than interest rates, since the big banks are for all practical purposes insolvent, and sitting on a mountain of bad debt. The same applies for the banks as servicers of mortgage-backed securities that have dubious or no paperwork indicating who is the current holder of the loan note/mortgage. And since the banks’ reluctant strategy of loan modification have proven that it’s not mitigating homeowners’ inability to pay their monthly mortgages, the banks, as servicers themselves, have their own incentives to the fees collected for foreclosing on as many houses as possible.)
All in all, a continuing and growing disaster for millions of Americans panicked and stressed-out at the prospect of being kicked out of their homes.