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Paul Davidson, USA TODAY
The federal government on Wednesday announced a new loan modification program designed to help many more struggling homeowners than previous initiatives by requiring no documentation of income or financial hardship.
Under the Streamlined Modification Initiative, borrowers with loans backed by mortgage finance giants Fannie Mae and Freddie Mac must be at least 90 days delinquent on their mortgage and and make three trial payments on time. The initiative is being launched by the Federal Housing Finance Agency, which regulates Fannie and Freddie.
"This new option gives delinquent borrowers another path to avoid foreclosure," says FHFA Acting Director Edward DeMarco.
Other programs to aid struggling homeowners, such as the Home Affordable Modification Program (HAMP), required borrowers to provide financial, income and hardship documentation. That created bureaucratic bottlenecks for many mortgage servicers that limited the effectiveness of the programs.
Also, some programs had to be financially viable to investors who did not want to suffer significant losses.
The new initiative will begin July 1, 2013 and end Aug 1, 2015. By July 1, mortgage servicers must identify delinquent borrowers and send them a letter offering the modification.
To reduce their monthly payments, borrowers will get a lower interest rate based on the average of 30-year fixed mortgages. The rate will adjust each quarter. Also, borrowers who owe more than their homes are worth will pay no interest on up to 30% of their unpaid balance. Borrowers on average are expected to reduce their monthly payments by 30%.
To be eligible, homeowners must be 90 days to 24 months delinquent on their loans. They also must have a first-lien mortgage that's at least 12 months old and the amount they owe on their mortgages must be at least 80% of their home value.
FHFA officials have not estimated the number of borrowers they expect to participate. But in a pilot program, 70% of those offered the opportunity took part in the trial and 50% of the latter group received a permanent loan modification.
Ira Rheingold, executive director of the National Association of Consumer Advocates, says he is skeptical the program will be effective because it doesn't lower the principal owed by borrowers to give them more equity in their homes. FHFA has been unwilling to do that.
About one in five homeowners owe more on their mortgages than their homes are worth. That has been an impediment to the revival of the housing market and the economy.
"Unless they address principal reduction, it's not good enough," Rheingold says. "The FHFA has been the biggest roadblock to this problem."
A cluster of loan modification programs launched by the Obama Administration since 2009 have helped far fewer homeowners than intended.
One, called the Home Affordable Refinance Program, was designed to help borrowers with mortgages backed by Fannie Mae and Freddie Mac refinance to low-interest-rate loans. They must be current on their payments and may qualify even if they have little home equity or they owed more than their homes were worth.
The program helped 1.1 million borrowers last year - more than twice as many as in 2011 - but overall it has refinanced about half the 4 to 5 million mortgages expected.
Another $1 billion initiative aimed at helping the jobless or underemployed avoid foreclosure ended in September after spending less than half its funds.
A third program requires mortgage holders to forgive part of a borrower's unpaid principal - something they have been reluctant to do.
Most of a $25 billion settlement with five large mortgage servicers over abuses, such as failing to read or verify documents, also was intended to go to loan modifications for delinquent borrowers.
Several of the programs were hindered by a combination of obstacles.
Many mortgage investors have been unwilling to forgo profits. Mortgage servicers often have greater incentives to foreclose on loans rather than modify them. And the mortgage industry generally was distracted by the effects of the housing crisis.