Source: Freddie Mac
Additional Details on the New Standard Modification Now Available
We have released our preliminary requirements for our new loan modification option, the Freddie Mac Standard Modification — a core component of the Servicing Alignment Initiative. Because you are a valuable resource when counseling distressed homeowners and working with Freddie Mac Servicers, I wanted to provide you with key details on the Standard Modification’s preliminary requirements today.
The new Standard Modification will reduce the risk of potential borrower re-defaults by providing borrowers with an option to achieve affordable first-lien mortgage payments, ultimately positioning them for greater long-term success and sustainable homeownership. Key features include:
Borrower Eligibility
The Standard Modification will provide a modification option for your clients who are ineligible for the Home Affordable Modification program (HAMP). In addition, eligible borrowers must:
- Be 60 days or more delinquent, or current or less than 60 days delinquent and determined to be in imminent default based on current Freddie Mac imminent default requirements in place for HAMP.
- Be able to document an eligible hardship that caused a permanent or long-term increase in expenses or decrease in income. (Unemployment and other temporary hardships are not eligible.)
- Have verifiable income available to make the modified mortgage payments. (Unemployment benefits are not eligible.)
If a borrower’s situation does not meet all the eligibility requirements, Servicers may submit a recommendation to Freddie Mac for review. This includes modifications where the gross unpaid principal balance (prior to capitalization) is less than 80 percent of the current mark-to-market valuation of the property.
Modification Structure
The key to the success of the Standard Modification is to reduce the eligible borrower’s first-lien monthly principal and interest mortgage payment by at least 10 percent and create a modified housing debt-to-income ratio that is greater than or equal to 10 percent and less than or equal to 55 percent. If the borrower’s pre-modified gross unpaid principal balance is greater than or equal to 80 percent of the current mark-to-market valuation of the property, the Servicer will follow a sequential process in the order specified below to determine the proposed modification terms and final eligibility:
- Capitalize the accrued interest and other eligible amounts (capitalize arrearages).
- Adjust the interest rate to a 5 percent fixed rate.
- Extend the amortization term to 480 months.
- Provide principal forbearance to certain borrowers whose current mark-to-market property value is significantly less than their debt.
Trial Period
The Standard Modification will require a three-month trial period (or longer if the borrower is in bankruptcy) to ensure that borrowers are able to meet the modified terms before being placed into a permanent modification. Among other requirements, borrowers must make timely monthly payments for each month of the trial period at the estimated modified payment amount to complete the trial period successfully and obtain a permanent modification. If the borrower does not complete the trial period successfully, Freddie Mac Servicers are required to pursue with the borrower all additional alternatives to foreclosure that may be available, such as a short sale or deed in lieu of foreclosure.
Effective Dates
Servicers may begin evaluating new borrowers for the Standard Modification upon the publication of our requirements, provided the trial period plans do not start earlier than October 1, 2011. All permanent Standard Modifications must have a first modified payment due date of January 1, 2012, or later. We will retire the existing Freddie Mac cash flow/surplus income modification in a phased approach that will allow a smooth transition for considering new borrowers for the new Standard Modification.
In conjunction with our focus on earlier and more frequent borrower contact, the Standard Modification’s structure will allow for a quicker evaluation and decision-making process for your clients seeking a loan modification. We are finalizing our operational approach and underwriting terms, and will issue complete requirements for Freddie Mac Servicers in the near future. We will contact you again as soon as these requirements are announced.
Please do not hesitate to contact me if you have any questions. Thank you for your continued support of the Servicing Alignment Initiative.
More Information
A fact sheet with more details on this initiative is available on the Housing Professionals Resource Center on FreddieMac.com. Freddie Mac offers a complete suite of webinar training opportunities on our new requirements specifically for housing counselors. Visit our Housing Professionals Resource Center for dates and times.
Sincerely,
Christina Diaz-Malone
Director, National Initiatives
703-903-2558