Freddie Mac has announced the immediate implementation of its Streamlined Modification program, a no-document modification program offered to severely delinquent borrowers. The implementation of the program, originally set to begin July 1, came six weeks earlier than expected in an effort to expedite financial relief for potentially thousands of distressed families.
Under the program, servicers are required to evaluate and send to eligible borrowers a Streamlined Modification letter and Trial Period Plan Notice. To be eligible, a borrower must be at least 90 days, but no more than 720 days, delinquent on mortgages that are at least 12 months old and meet certain other criteria. Borrowers who receive solicitation letters can simply elect to submit the modified payment to begin the trial period without submitting a response package. Borrowers who successfully complete the trial period may enter into a permanent modification.
The Streamlined Modification enables servicers to modify a borrower’s mortgage by adjusting interest rates, extending payment terms to 40 years, and providing principal forbearance for certain underwater borrowers.
In a press release Freddie Mac announced the date change was made because it is “focused on adding momentum to the housing recovery by giving distressed borrowers more options to avoid foreclosure.”
Both Freddie Mac and Fannie Mae are aligned on streamlined modification under the Servicing Alignment Initiative.
Mitigating Alleged Damages Resulting from Default
Following the housing boom, the mortgage industry has seen a flurry of repurchase demands and indemnification requests lodged against loan originators by major national banking institutions, investors, and GSEs such as Fannie Mae and Freddie Mac.
More often than not, the parties making such demands inflate their alleged damages and fail to mitigate the damages they claim. In fact, servicing analysts have customarily included corporate and interest advances through foreclosure when computing damages, instead of alleging their actual damages were equal to the unpaid principal loan balance.
When litigating or settling repurchase demands, loan originators should consider whether servicers properly mitigated their alleged damages. Repurchase claims could be barred in whole or in part by servicer’s failure to maintain and sell the mortgaged property for its full value, timely notify originators of default or foreclosure, and properly service the defaulted loan.
As many borrowers started to lose their jobs and the housing market began to decline, more and more borrowers re-evaluated their options. During this time, it was not uncommon for servicers to receive hardship letters from borrowers pleading for re-consideration of their loan modification application, who were often told they do not qualify with little explanation. In many instances, programs such as Freddie Mac’s Streamlined Modification could have benefited both parties.
Despite the fact that loan modification programs existed in the years following the demise of the housing market, the most common outcomes were still foreclosures and short sales.
It should also be mentioned, however, that loan originators take the position that a loan modified by a servicer without the originator’s involvement is not the same loan that was sold and therefore is no longer subject to repurchase claims.
Nonetheless, the unwillingness of Fannie and Freddie to properly service defaulted loans and otherwise adopt programs like Streamlined Modification sooner has resulted in their failure to mitigate the damages they now allege.
Fannie and Freddie are a day late and hundreds of millions of dollars short.