Fannie Program Sees 70% Recidivism

A program aimed at helping delinquent borrowers become current once more on their mortgages will likely see decreased volumes at mortgage giant Fannie Mae (FNM: 1.04 -7.14%) after the Federal Housing Finance Agency (FHFA) noted a significant majority of participants soon redefaulted after receiving aid.

Fannie first launched the HomeSaver Advance (HSA) program in February ‘08 as a solution for borrowers experiencing temporary hardship. It allows servicers to offer unsecured, personal loans so delinquent borrowers can keep up on payments until the temporary hardship — unemployment, sickness, etc. — passes and borrowers can resume regular payments.

“This loan can offer these borrowers another alternative, and help prevent a temporary setback from becoming a foreclosure,” a Fannie executive in the single-family credit risk management division said in a media statement announcing the program.

But as mortgage performance deteriorated through ‘08, Fannie’s conservator, FHFA, noticed an alarming trend among the mortgages participating in the advance program.

“HSA is showing high redefault rates on the early offerings,” FHFA director James Lockhart noted in a Congressional report this week. “Performance on the February through April offerings shows a redefault [or recidivism] rate of almost 70%, which calls into question the program’s assumptions that borrowers have the capacity to make payments going forward.”

In response to the sliding performance of these mortgages, Fannie took steps to focus on modification options like the Administration’s Making Home Affordable (MHA) program. The company revised its mortgage workout heirarchy to favor the Home Affordable modification program.

“The HSA is not an appropriate foreclosure prevention alternative, and must not be used, for a borrower with a permanent or long-term financial hardship,” Fannie officials said in the late-April report revising its heirarchy. Instead, the new heirarchy reccommends HSA as an appropriate alternative to the MHA modification program in cases where the borrower experiences only a temporary hardship and cannot qualify for MHA.

“Given the depth and scope of MHA, we anticipate a decrease in HomeSaver Advance volumes,” Fannie spokesperson Amy Bonitatibus tells HousingWire. “Although HomeSaver Advance loans continue to be a viable foreclosure prevention solution for borrowers facing a temporary hardship, other home retention strategies, particularly modifications, are becoming more prevalent based on assessments of the needs and condition of borrowers.”

Write to Diana Golobay.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.