A day that many in the housing industry thought would never come is finally and actually here, as the Federal Housing Finance Agency is making official what was first reported several weeks ago – widespread principal reduction is coming.
In what it is calling a “final crisis-era modification program,” the FHFA announced Thursday that it will be launching a principal reduction program for some borrowers whose loans are owned or guaranteed by Fannie Mae or Freddie Mac.
But the program is not quite as widespread as was first reported.
Initial reports in the Wall Street Journal suggested that the FHFA’s principal reduction program may make fewer than 50,000 “underwater” borrowers eligible for principal reduction, but what wasn’t known until Thursday was the exact number of borrowers the FHFA’s program could affect.
The FHFA said Thursday that it expects approximately 33,000 borrowers to eligible to participate in the principal reduction program due to very specific eligibility requirements.
According to the FHFA, principal reductions will be available to owner-occupant borrowers who are 90 days or more delinquent as of March 1, 2016, meaning that borrowers will not able to “strategically default” in able to receive principal reduction.
Additionally, the program will only apply to borrowers whose mortgages have an outstanding unpaid principal balance of $250,000 or less, and whose mark-to-market loan-to-value ratios are more than 115%.
For years, the leadership of the FHFA, Fannie, and Freddie claimed this day would never happen. They all said the GSEs were in conservatorship, not receivership, and so a reduction in asset values would be counterintuitive to that status.
According to the FHFA, this program will give seriously delinquent, underwater borrowers “last chance” to avoid foreclosure by providing principal reduction in a straightforward and timely manner.
“FHFA believes that this final crisis-era modification program will provide seriously delinquent borrowers a last opportunity to address negative equity and to avoid foreclosure and will also help to improve the stability of neighborhoods that have not yet recovered from the foreclosure crisis,” the FHFA said in prepared materials.
According to the FHFA, the eligible loans are heavily concentrated in Florida, New Jersey, New York, Illinois, Ohio, Pennsylvania, Nevada and in” hardest hit communities.”