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Fiscal Cliff Deal May Include Loan Modifications for Non-Agency Mortgages


Here’s a little nugget of potentially good news that may materialize out of the fiscal cliff.

The Treasury Department is reportedly floating a new initiative, referred to as the “Market Rate Modification Program,” which will allow underwater borrowers with non-agency mortgages to do a rate and term refinance to take advantage of today’s low interest rates.

As it stands, if Fannie Mae, Freddie Mac, or Ginnie Mae don’t back your mortgage, getting a loan modification is difficult, if not impossible.

And while most newly originated loans are now backed by these government agencies, many non-agency mortgages, also referred to as private-label mortgages, were originated during the housing boom.

As a result, millions of Alt-A loans, subprime loans, option arms, jumbo loans, and so forth are not eligible for the existing government refinance and modification programs, such as the popular HARP II.

The Treasury Department has determined that “Significantly Underwater Borrowers,” characterized as those with loan-to-value ratios of 125% or higher who have such loans are more likely to default, despite being current on payments.

In short, these borrowers are unable to get the assistance fellow Americans (or even neighbors) receive because their loans aren’t backed by Fannie, Freddie, or the FHA/VA, so the Obama Administration fears they may walk.

Obviously, the last thing we need is more foreclosures, especially now that everyone seems to think we’ve “turned the corner.”

How the Market Rate Modification Program Would Work

It all sounds quite simple. If you’re one of those “Significantly Underwater Borrowers” that is current on mortgage payments, all you’d need to do is provide a hardship affidavit with your application.

The letter is meant to prove a “reasonably foreseeable default” under mortgage securitization rules to appease investors who might otherwise prefer their higher original yield.

From there, if approved, participating loan servicers would lower your mortgage rate to the “current market rate,” as determined by the Freddie Mac Primary Mortgage Market Survey.

At last check, the going rate for a 30-year fixed was a very attractive 3.32%, a far cry from the 6-7% rates seen during the housing run-up.

Surely that reduction in mortgage payment would make homeowners think twice about hating their “now worthless” properties.

Each month during the five years after the modification took place, the Treasury would pay loan servicers the difference in interest between the borrower’s old rate and new.

After the five years are up, the Treasury would stop compensating servicers, regardless of whether said loans were above water or not, and the borrower’s interest rate would remain at the lower rate.

Apparently this would appease investors while also providing much needed relief to homeowners thinking of throwing in the towel.

It would also provide much needed stability to the housing market, which is surely not yet on solid ground.

Why It’s Important

Back in 2009, I wrote about private-label mortgages, which while only making up a small percentage of total mortgages outstanding, accounted for 62% of the delinquencies.

If these bad loans continue not to be addressed, the resulting defaults and foreclosures could hamper a housing recovery for everyone, including those with agency-backed loans.

So this is a very important initiative, and one that could make the impending fiscal cliff a little less painful.

For the record, House Democrats are also working on a bill that would provide principal reductions for those with Fannie and Freddie backed loans.

Of course, the more they attempt to stuff into negotiations, the longer it will take to reach a resolution.

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