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FHFA Authorizes Principal Reduction for GSE Loans

An estimated 33,000 delinquent Fannie Mae and Freddie Mac (GSE) borrowers will be eligible for a new one-time principal reduction.

To be eligible for the new Principal Reduction Program borrowers must be both seriously delinquent and underwater on GSE mortgages, defined as 90 days or more past due as of March 1, 2016 and with mark-to-market loan-to-value ratios (MTMLTV) after of capitalization of arrearages of 115 percent or more. Loans must have an unpaid principal balance of $250,000 or less and the property must be owner occupied.

Under the new program modification terms include capitalization of existing arrearages, an interest rate reduction down to the current market rate, extension of the loan term to 40 years and forbearance of principal and/or arrearages up to a certain amount. The forborne amount can be forgiven after three timely mortgage payments and acceptance of the final modification.

Servicers will be required to notify borrowers meeting eligibility criteria of the program's terms for a loan modification no later than October 15. As servicers will require some time to implement the program, borrowers have the option to pursue a Streamlined Modification that will halt foreclosure proceedings but will not guarantee principal forgiveness. If the borrower is deemed eligible after the program is in effect that Steamlined Modification can be converted into the new program.

FHFA points to the March 1 cut-off for eligibility and stressed that borrowers should not default on their mortgage or on an existing modification in an attempt to become eligible for a Principal Reduction Modification.

FHFA also announced today that it has approved further enhancements to its requirements for Freddie Mac and Fannie Mae's sales of non-performing loans (NPLs). These changes will establish that buyers of the loans must evaluate borrowers whose MTMLTV ratio exceeds 115 percent for modifications that include principal reduction and/or arrearage forgiveness. The new rules also forbid buyers from unilaterally releasing liens and "walking away" from vacant properties; and, 3) establish more specific proprietary loan modification standards for NPL buyers.

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