Fannie, Freddie Push
Aims to Contain Defaults
By JAMES R. HAGERTY
August 4, 2008
Fannie Mae and Freddie Mac, trying to contain mortgage-default losses, are redoubling efforts to prevent foreclosures.
In some cases, though, these moves may only delay the inevitable, easing pressure on the companies’ finances in the short term without resolving their troubles.
The two U.S.-government-sponsored guarantors of home loans last week said they will increase fees they pay loan-servicing companies for “workouts” that prevent foreclosures. (Servicing companies collect loan payments and handle other administrative tasks.) Freddie also said it will give servicers more time to pursue such workouts.
Both companies emphasized that they want to keep families in homes. But Joshua Rosner, an analyst at the New York research firm Graham Fisher & Co. and frequent critic of the companies, said they were trying to conserve cash. “It seems they would rather pay servicers to keep the losses rolling into the future even if close to a majority of borrowers redefault because they are unable to handle the mortgages,” Mr. Rosner said.
Under Freddie’s new incentives, loan servicers will be paid $800 for modifying the terms of a mortgage to avoid foreclosure, up from $400. Freddie also agreed to raise the amount it pays servicers for arranging short sales — in which a lender accepts less than the full amount owed on the loan when a home is sold — to $2,200 from $1,100. Fannie announced similar increases in incentives.
In places with relatively quick foreclosure processes, Freddie said it will allow servicers as many as 300 days from the due date of the last payment to seek alternatives to foreclosure. This policy applies to Alabama; Alaska; Arizona; Arkansas; California; Georgia; Hawaii; Maryland; Michigan; Minnesota; Mississippi; Missouri; New Hampshire; North Carolina; Rhode Island; Tennessee; Texas; Virginia; West Virginia; Washington, D.C.; and Wyoming. Freddie said the new policy doesn’t apply in other states, where the foreclosure process normally takes more than 300 days.
Late last year, Fannie and Freddie both adopted policies that delay the need to recognize losses on some delinquent loans. The two companies guarantee payments on loans that back mortgage securities held by others. If borrowers default on those loans, Fannie and Freddie have to compensate the investors. Until December, Freddie’s policy generally was to buy problem loans from the investors shortly after they become 120 days overdue. Now, it can wait until payments are as much as 24 months overdue. Fannie made similar changes late last year.
When Fannie and Freddie buy delinquent loans from investors, the companies must mark the loans down to estimates of their current market value.
In another step aimed at slowing the flood of foreclosures, Fannie earlier this year began offering to finance unsecured loans of as much as $15,000 to people who have fallen behind on their mortgage payments. These loans are designed to allow the borrowers to pay the past-due amounts on their mortgages. These 15-year loans are aimed at people who fell behind on their payments because of a temporary financial squeeze — caused, for instance, by a divorce, death in the family or medical problem — but who can afford to meet future monthly payments, Fannie officials have said. Some critics say the loans may be just a stopgap that saddles people with additional debt they can’t afford.
Fannie and Freddie have reported combined losses of about $11 billion for the nine months ended March 31, largely because of defaults. Freddie is due to report second-quarter results Wednesday. Fannie also is expected to report results for the quarter soon but hasn’t announced a date.
