Has Streamlining Benefited Loan Mods?

Back in 2013, Fannie Mae launched a streamlined, no-documentation loan modification program to help more beleaguered borrowers dodge foreclosure and remain in their homes. Contrary to expectation, the innovative program not only has a high usage rate but also increases the overall success of mortgage modifications by 34 percent, according to a new Urban Institute research.

“If the streamlined approach had been available over the entire 2012–15 period, it would have prevented 6,100 additional foreclosures each year on Fannie Mae mortgages,” the research said. “This provides compelling evidence that the streamlined approach is beneficial to loss mitigation.”

Just how beneficial? When looking at data from 2012 to 2015, the rate at which distressed borrowers gave the go-ahead to participate in a modification—aka, the “take-up” rate—rose from 20.2 percent without streamlining to 29.2 with the program, the report says, (that’s a 9-percentage-point, or 44.6 percent, improvement).

Advantages aside, streamlined mods post a higher redefault rate, even after controlling for borrower characteristics. The reason? Applicants who submit documentation might be more motivated to make the modification work, the report explains.

The success rate for streamlined modifications totaled 64.1 percent in the first 36 months following modification, compared with a 68.9 percent success rate for standard modifications (a program with the same payment but requiring more documentation), the report indicates.

Some 15.9 percent of delinquent borrowers continue to hand in the full documentation, the report found, while 13.3 percent accept the modification offer requiring fewer supporting documents. That said, the study noted a smaller net benefit (24.6 percent) for people who give a nod to a streamlined mod. Once the streamlined option comes into play, the net benefit of the entire modification program is 7.9 percent or an almost 34 percent improvement over the baseline.

And that’s proof enough to earn the program an unequivocal thumbs up, the Urban Institute said.

“Our research … confirms that the streamlined modification approach adopted in this Flex Mod program is a positive innovation,” the Urban Institute said. “We expect to see its widespread adoption by portfolio lenders and the private-label securities industry as well.”