Magazine article Mortgage Banking

Fending off Foreclosure: Lenders and Investors Are Perfecting Ways to Throw Lifelines to Borrowers Whose Loans Are Heading for Trouble

Magazine article Mortgage Banking

Fending off Foreclosure: Lenders and Investors Are Perfecting Ways to Throw Lifelines to Borrowers Whose Loans Are Heading for Trouble

Article excerpt

FENDING OFF FORECLOSURE

Fannie Mae, a long-time leader in the default mitigation field, plans to push lenders harder this fall to find alternatives to costly foreclosures.

At the same time, Freddie Mac is said to be at work on a pre-foreclosure sale program similar to Fannie Mae's. And the Federal Housing Administration (FHA) is expected to start a foreclosure alternatives program by the end of the year.

As foreclosure costs continue to rise, it's no surprise to see major mortgage investors such as Fannie Mae, Freddie Mac and mortgage insurers such as HUD, improving and refining their foreclosure prevention efforts.

Lenders benefit from the absolute dollars saved when a default is cured and a delinquent loan returns to the regular servicing portfolio. And the more delinquencies a lender cures, the fewer employees needed to handle foreclosures.

Taking the lead over the past three years, Fannie Mae modified 14,000 loans and assisted with pre-foreclosure sales on another 3,000 loans to prevent them from moving into the costly foreclosure arena. The corporation would like to see more of the same in the years to come.

"In the 1990s, these are the programs we want our lenders to pursue. There's got to be an alternative to foreclosure," says Tom Ducey, Fannie Mae's director of loan servicing and lender standards.

Freddie Mae also appears to be joining the foreclosure prevention club. The corporation is now actively working on a pre-sale program of its own, sources say.

FHA, too, is working on a pre-sale program, an option now open to them thanks to legislation passed in 1988. However, the agency may require lenders to review the pre-sale potential of every loan and to rely on third parties to negotiate the pre-sales. That worries some lenders.

"My concern is that they will develop something so cumbersome that it won't be useful... that it will be difficult for us to work with," says one source familiar with the program.

Relaxing the rules

For lenders, mortgage insurers and investors, many of today's default mitigation lessons were learned during the record high foreclosures of the mid-1980s. Faced with thousands of REOs and whole neighborhoods up for sale, lenders wanted to avoid adding to their inventories of foreclosures. But too often, agency guidelines worked against that goal.

For instance, when the oil patch states went bust back in 1986, Fannie Mae policy prohibited adjusting interest rates or payments to modify loans in default, explains Ducey.

At that time, homeowners with rising, unpaid principal balances due to negatively amortizing loans - a feature they may or may not have understood - watched while their property values dropped. Thousands of these loans fell into default.

In response, Fannie Mae began a pilot default mitigation program. Looking for delinquent borrowers who wanted to stay in their homes and could afford to do so, the corporation began modifying loans to prevent foreclosures in oil patch states.

In 1988, Fannie Mae took the program one step further. Instead of waiting for a borrower to default, Fannie Mae combed its portfolio to weed out defaults before they happened.

Fannie Mae searched among its loans in distressed economies for mortgages with two of three characteristics: high interest rates; prior delinquencies and negative amortization.

Then it began modifying the loans; shifting borrowers into more affordable, fixing-rate mortgages.

Fannie Mae also reconsidered its guide provisions for another option available to lenders working with seriously delinquent borrowers: pre-foreclosure sales.

Ducey sums up Fannie Mae's thinking on pre-foreclosure sales this way: "If [a] house was going to have to be sold, why not sell it before it went to foreclosure?"

Neither of these options are a "give-away," he says. …

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