New Rules for Federal Mortgage Loans

By LESLIE BERKMAN
The Press-Enterprise  In a step that will let people learn sooner if they are eligible for a federal mortgage modification that could save their home from foreclosure, the Obama administration Thursday said it will require loan servicers to qualify applicants before putting them in a trial mortgage modification program.

Under the government’s Making Home Affordable program introduced early last year, mortgage servicers could put homeowners in modified loans for a trial period after receiving only verbal information from homeowners about their financial situation.

Nonprofit housing counselors complained that because loan servicers routinely have delayed more in-depth evaluation of a homeowner’s eligibility, such as a review of pay stubs and other records, some applicants diligently have made trial mortgage payments for months only then to be told they don’t qualify.

Banks also said they had to stretch the trial beyond the specified three months because many applicants failed to provide the paperwork to determine if they could afford the proposed reduction in their monthly payment. Payments are reduced by lowering the interest rate, extending the length of the loan or by postponing repayment of a portion of the loan balance.New federal guidelines, which become effective June 1, require loan servicers to fully verify a borrower’s eligibility prior to offering a trial plan. Borrowers then are assured that if they keep current during the trial period they will get a permanent mortgage modification.

The new guidelines apply to loans that are not owned by Fannie Mae or Freddie Mac. However, a spokesman for Freddie Mac said it will provide the same directive to its loan servicers today. It was uncertain what Fannie Mae will do.Rose Mayes, executive director of the Fair Housing Council of Riverside, which provides foreclosure prevention counseling, said the early clarification will help her clients.

“They don’t need to be on an emotional roller coaster,” she said.

Mayes said it would be better for homeowners who cannot be helped to be told the truth before they struggle to make payments during a trial modification. She said in some cases they have dipped into their retirement savings and spent money they could have used for moving expenses.

“Any effort to streamline the process is positive because everyone has been stuck in these trial modifications,” said Kevin Stein, associate director of the California Reinvestment Coalition, a consumer advocacy organization.

Stein argued, however, that changes in procedures aren’t enough to make a significant dent in the foreclosure problem gripping the nation. He said other changes in how modifications are done are needed to make more problem mortgages affordable.

So far, 66,465 permanent mortgage modifications have been achieved under the Obama program, with another 46,000 pending. That is dwarfed by the estimated 3.35 million mortgages that are at least 60 days delinquent and might be considered for modification, Stein noted.

The U.S Treasury said it saw improvement when from Dec. 23 to Sunday, it called for an intensive review of mortgages in trial modification to make certain borrowers were being fairly evaluated. During that time borrowers were notified of any missing documents and given a chance to correct any errors in their applications. The Treasury reported that as a result, the number of loan modifications converted from trial to permanent status more than doubled.

Jason Menke, spokesman for Wells Fargo Home Mortgage, said that bank will start March 1, ahead of the Treasury deadline, to verify income before starting trial modifications. He said the bank supports the move. “We believe that while it will reduce the number of trial starts initially, it ultimately will result in a higher percentage of customers who will complete the program,” he said.

Reach Leslie Berkman at 951-368-9423 or lberkman@PE.com

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