By Rick Tobin
There have been millions of homeowners since 2007 (the official start of the ongoing “Credit Crisis”) who have struggled to make their monthly mortgage payments, partly due to employment challenges, increasing consumer expenses, high student loan balances, and / or other negative financial factors. For the vast majority of Americans, the equity (the current market value minus the existing mortgage debt) in their owner-occupied single-family home, or some other type of residential property, represents the single largest portion of their entire family’s net worth. As such, a significant percentage of Americans keep a closer eye on the equity cushions in their real estate, than they do on the directions of the stock market.
The number #1 reason why homeowners usually walk away from their owner or non-occupied residential property is when the existing mortgage debt balances exceed the current market value of the same property. Many states like California protect homeowners from future financial liability who decide to walk away, or give their keys back to the lender, when they have zero or negative equity left in their properties, as long as the owner had obtained a mortgage loan to first acquire the property.
Many homeowners and U.S. citizens have vocally complained about the fact that there have been a significant number of financial bailouts of the large mega-banks, investment banks, insurance companies, hedge funds, and other primary (banks) and secondary mortgage market investors like Fannie Mae and Freddie Mac over the years, but few individual bailouts for homeowners or other property investors. One of the main federal agencies that has attempted to assist both the financial markets and individual property owners during the ongoing Credit Crisis is the Federal Housing Finance Agency (FHFA). In recent times, their programs may seek to provide assistance to struggling homeowners with the possibility of mortgage principal reduction in addition to mortgage payment reduction.
The Federal Housing Finance Agency
The Emergency Economic Stabilization Act of 2008 (H.R. 1424) was enacted near the beginning of the Credit Crisis back in 2008, in order to attempt to bring financial stability back to the markets. The act declared the purpose and intent for the general public as follows:
“To provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes.”
(source: https://www.gpo.gov/fdsys/pkg/PLAW-110publ343/pdf/PLAW-110publ343.pdf )
The Emergency Economic Stabilization Act of 2008 gave power to the Federal Housing Finance Agency (FHFA) to take over, manage, and regulate both Fannie Mae and Freddie Mac in late 2008. At the time, Fannie Mae and Freddie Mac (the two largest secondary mortgage market investors for residential loans in the U.S. holding trillions of dollars of mortgages in their respective portfolios) were rumored to be near complete financial insolvency and on the verge of bankruptcy. Had Fannie Mae and / or Freddie Mac completely imploded, then it would have potentially hurt the U.S. housing market more than any other event over the past century or so.
The Federal Housing Finance Agency is an independent federal agency which was created as a merger of a few other governmental agencies, which included the Federal Housing Finance Board (FHFB), the Office of Federal Housing Enterprise Oversight (OFHEO), and the U.S. Department of Housing and Urban Development (HUD). Additionally, FHFA is in charge of regulating the 12 Federal Home Loan Banks which work closely with other types of commercial banks throughout the U.S.
FHFA was given the authority to manage, regulate, and to place into receivership primary and secondary market lenders or investors. Effectively, FHFA assists with the regulations and supervision of both the funding banks and the secondary market investors that purchase these loans at a later date.
HARP and HAMP
Many fortunate owners were able to work out loan modifications with programs such as HARP (Home Affordable Refinance Program) and HAMP (Home Affordable Modification Program), which assisted struggling homeowners with options such as reducing their interest rates, increasing their loan terms, or reducing their monthly mortgage payment amounts. Yet, very few homeowners were able to reduce their existing mortgage principal balances in order to improve their current equity position from negative to positive.
HARP: The Home Affordable Refinance Program was put into place by FHFA in 2009 to assist residential property owners with options such as the possibility of loan modification or payment reduction programs by lowering interest rates and increasing loan terms. The program was also designed to make it easier to qualify for the loan modification programs as compared with other types of home loan mortgage options at, or above, 100% LTV ratios for properties with zero to even negative equity.
To date, several million homeowners have reduced their mortgage payments through the HARP loan modification program. HARP tended to focus on refinancing loans acquired by Fannie Mae or Freddie Mac on or before May 31, 2009.
HAMP: The Home Affordable Modification Program was created to assist homeowners with residential mortgages funded on or before January 1, 2009. This loan modification program was also designed for loans insured or owned by Fannie Mae or Freddie Mac.
One of the main goals for HAMP modifications was to reduce the mortgage payments for borrowers to no more than 31% of the borrower’s pretax monthly income. In order to reduce payments so much, the existing loan’s mortgage rate may be lowered either temporarily or permanently, the loan term may be increased from 30 years up to as high as 40 years, and the rate term may be modified from a fixed-rate loan to a step loan (or lower adjustable loan). In most cases, the maximum allowable mortgage loan which can qualify for the HAMP program is the “High-Cost Region” (i.e., prime and very expensive coastal regions) limit of up to $729,500. For more information on these loan modification programs, please visit this website: https://www.makinghomeaffordable.gov
FHFA’s Principal Reduction Plan
After years of hope and speculation that one or more federal agencies would eventually begin to offer mortgage principal reduction programs (i.e., an option when a home valued at $200,000 has a $225,000 loan balance that may be reduced to under the current market value), the Wall Street Journal published an article entitled Fannie, Freddie to Cut Mortgage Balances for Thousands of Homeowners (date March 21, 2016), indicating that widespread mortgage principal reduction program options may be forthcoming soon.
Some financial analysts describe this as the “final crisis-era modification program” being offered by FHFA for struggling homeowners with Fannie Mae or Freddie Mac insured loans. The odds are quite high that a property owner who had a conventional or conforming loan amount not insured by FHA or VA, will also have a loan that Fannie Mae or Freddie Mac currently holds in their portfolio.
Some of the potential options or requirements being suggested for principal reductions from FHFA for underwater or upside down homeowners include:
* Principal reductions may be available to owner-occupied homeowners who are 90 days or more delinquent on their mortgage payment as of March 1, 2016.
* The first loans to qualify for these principal reduction programs will most likely target homeowners with loan balances of $250,000 or less.
* The market-to-market loan-to-value ratios for these $250,000 or below loans may need to be under 115%.
The principal reduction requirements and regulations are different than the Fannie Mae and Freddie Mac currently streamlined modification programs, as said by the FHFA in their own words below:
In existing Streamlined Modifications, servicers capitalize outstanding arrearages into the loan’s principal balance; set the loan’s interest rate to the current market rate; extend the loan’s term to 40 years; and, if a borrower has a MTMLTV ratio greater than 115%, forbear principal to 115% of the MTMLTV ratio or 30% of the unpaid principal balance (UPB), whichever is less. Principal forbearance defers payments on a portion of outstanding principal until the end of the loan and makes it non-interest-bearing. This reduces a borrower’s monthly payment but, unlike principal forgiveness, does not reduce a borrower’s overall indebtedness.
Under the Principal Reduction Modification, servicers will follow the same modification steps they currently follow for Streamlined Modifications, except that principal reduction will be used instead of principal forbearance. Consequently, the amount of principal and/or capitalized arrearages that would have been forborne under a Streamlined Modification will be forgiven instead. This will reduce the borrower’s debt burden. Additionally, this will result in the same loan modification payment for borrowers as they would have received under a Streamlined Modification.”
Per the FHFA, the possible loan modification programs (interest and principal reductions) could include the chance to increase the borrower’s loan term from 30 to 40 years, reduce the interest rates, and eliminate significant amounts of loan balances or principal amounts with no future financial liability risks for the borrower.
As the FHFA continues to iron out the details for this principal reduction program, readers of REI Wealth should continue to keep a close eye on this principal and payment reduction program option. This principal reduction program option could mean the difference between staying in one’s family home for many more years or decades and improving the family’s overall net worth significantly, or losing the home to foreclosure or selling the home at a loss. As such, this is very important story for homeowners and investors to follow in the near term.
Author: Rick Tobin 
Look for Rick’s ebook on Amazon Kindle: The Credit Crisis Deals: Finding America’s Best Real Estate Bargains. Rick Tobin has a diversified background in both the Real Estate and Securities fields for the past 25+ years. He has held seven (7) different Real Estate and Securities brokerage licenses to date. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), Equity Funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com.