Fannie and Freddie allow mortgages to be modified
If you're behind on your mortgage, you may be able to get lower monthly payments and avoid foreclosure through a new government program that went into effect Dec. 15.
It all depends on whether your loan is owned by one of the two government-controlled companies that provide most of the money for home mortgages.
If it is -- and where you send your monthly mortgage check won't tell you that -- then you could qualify to have your payments reduced to no more than 38% of your monthly household income. That limit will include taxes and insurance.
The Federal Housing Finance Agency will lower your interest rate, defer part of your debt or extend the length of your loan to reach that goal.
That's possible because the federal government bought a majority stake in the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) back in September.
The two companies still buy about 70% of the home loans made by banks and mortgage companies in this country. They keep some of that debt and sell the rest to big investors, including mutual funds and foreign governments.
To find out if Fannie or Freddie own your loan, call and ask the mortgage servicing company that you send your check to each month.
If they do, there's a long list of requirements to qualify for help. You must:
- Live in the home as your primary residence. (No investment properties.)
- Be 90 days or more past due on your mortgage, or have suffered a financial setback that will make it impossible for you to continue making your mortgage payments.
- Have loan payments (principal, interest and home owner association fees, but not including property taxes) that are more than 38% of your household income.
- Have experienced a hardship or change in financial circumstances that affects your ability to pay the mortgage. This could be anything from an adjustable-rate mortgage that reset to a much higher interest rate to losing a job or falling ill. This condition is part of the deal to make sure borrowers don't stop making payments they can afford just to get a lower interest rate.
- Have a loan that was written before Jan. 1, 2008.
- Owe at least 90% of the home's value. If you owe more than your home is worth, that's OK.
- Not be in bankruptcy.
Federal housing officials won't estimate how many borrowers they expect will take advantage of this new program. That's probably good. Their predictions for previous foreclosure-prevention efforts have been wildly inflated.
Less than a month after the program was announced in November, the rules were rewritten to include more borrowers.
It was originally limited to borrowers who had already fallen several months were behind on their payments. But Fannie Mae now will consider homeowners who are reasonably certain that falling income will cause them to miss payments in the near future.
Borrowers who are not deliquent and who show good faith by making reduced payments during a four-month trial period can have their loan permanently modified.
If you're lucky enough to qualify for the program, the government will lower your monthly payments by:
- Reducing the interest rate.
- Extending your payments for another 10 or 20 years.
- Deferring the repayment of some of your debt and charging no interest on that portion of the principal.
The one thing the government will not do is reduce the amount you owe, even if you're upside-down and your home is worth tens of thousands of dollars less than the balance on your mortgage.
"This is not loan forgiveness; the loans will be paid but at terms affordable for borrowers," says Brian Montgomery, commissioner of the Federal Housing Administration.
That's too bad, because reducing the principal is a great way to cut mortgage payments. Many borrowers may decide that their homes have lost so much value, it doesn't make financial sense to keep paying on them.
It's no secret that many families facing foreclosure never had any equity in their homes, because they financed the entire purchase price.
That's why 39% of all foreclosures are occurring in just two states -- California and Florida -- where "no down" deals were common and home prices have fallen the most.
First American CoreLogic, a real estate data company, just released a study that shows one in every four homes with a mortgage is upside-down or very close to being so.
No one should sign up for this program thinking it will solve all of their money problems. It won't be easy to make ends meet even after your mortgage payments are reduced to 38% of your pretax income.
The standard rule of thumb is that all housing costs, including taxes and insurance, shouldn't exceed 26% of your pretax income.
Indeed, your total monthly debt payments, including auto loans, student loans, credit card bills and child support, shouldn't exceed 36% of your pay.