New Rewards, Penalties for Mortgage Mods

Having trouble refinancing your mortgage, even though you meet all the requirements set by the federal government? Fannie Mae and Freddie Mac, the two government-owned mortgage giants, announced recently that they will use cash to encourage loan servicers to modify loans, and impose new penalties against companies that break the rules.

Loan servicers that complete a modification application within six months of the borrower becoming delinquent will get $500. Those who miss the deadline will pay $500. After that, servicers that make a successful modification will get between $400 and $1,400, depending on how quickly they complete the process.

“This initiative will direct servicers to reach families earlier, communicate more frequently and clearly, and provide relief,” Michael J. Williams, president of the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, said in a press release.

The final rules will not be announced until the second quarter of 2011. They will include requirements that servicers respond to borrowers’ phone calls and emails within a certain time, and deadlines for how quickly servicers must give notice of delinquency and inspect houses facing foreclosure.

Loan servicers act as middlemen in the mortgage process. They receive checks from homeowners, pay the taxes and insurance, and pass profits on to investors. Unlike investors and homeowners, however, servicers actually earn higher profits when a home slides into foreclosure, reducing their incentive to modify loans and keep homeowners in their houses, according to research and testimony by the Center for Responsible Lending, which we covered here.

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The action by Fannie and Freddie is not the first attempt by the federal government to change servicers’ behavior. The Obama Administration hoped the Home Affordable Modification Program would encourage servicers to modify more loans. The program was a spectacular failure, mostly because its incentives were too small compared to how much money servicers continue to make from foreclosures, according to a Congressional Oversight Panel report covered here.

Fannie and Freddie’s goals for their servicing initiative appear to be more modest by comparison. Gone is talk from the Obama administration of saving four million homeowners from foreclosure (at most, HAMP actually will prevent 800,000 foreclosures, the oversight panel found). Instead, the agencies hope homeowners will simply gain better information about where they stand in the process.

The initiative “should give homeowners a greater understanding of the process and faster resolution by requiring earlier contact, more frequent communication, and prompt decisions,” Edward J. DeMarco, the FHFA’s acting director, said in a press release.

Image: James Thompson, via Flickr