FHFA announces new rules for non-performing loan buyers

Buyers must evaluate certain borrowers for modification

Announcing a widespread principal reduction plan wasn’t the only big move that the Federal Housing Finance Agency made on Thursday.

In addition to releasing its plans to cut the mortgage balances on as many as 33,000 borrowers, the FHFA also announced new rules for the investors that buy non-performing loans from Fannie Mae and Freddie Mac.

The new rules are “further enhancements” to the NPL buyer requirements it announced just over a year ago.

Under the new rules, buyers that purchase non-performing loans from Fannie or Freddie must now evaluate certain underwater borrowers for modifications that include principal and/or arrearage forgiveness.

Buyers are also forbidden from “walking away” from vacant homes, and the new rules establish more specific proprietary loan modification standards for NPL buyers.

According to the FHFA, these new rules are designed to minimize foreclosures, help mitigate the potential for neighborhood blight and decay, and help improve loan modification success rates.

“The national housing market has significantly improved in recent years, but there are still areas of the country where home values have not recovered and negative equity remains a real problem,” said FHFA Director Mel Watt. “The Principal Reduction Modification program we are announcing today, along with the changes we are making to our NPL sales guidelines, will allow an opportunity for delinquent, underwater borrowers in these areas to avoid foreclosure and save their homes.”

Under the new guidelines, NPL buyers must evaluate borrowers whose mark-to-market loan-to-value ratio exceeds 115% for modifications that include principal reduction and/or arrearage forgiveness.

NPL buyers are also now prohibited from unilaterally releasing liens and “walking away” from vacant properties.

According to the FHFA, analysts and advocates have raised concerns that investors may walk away from the most challenging loans in NPL pools, leaving vacant houses in neighborhoods and contributing to blight and decay.

If a foreclosure alternative is not possible, servicers for NPL buyers must complete either a foreclosure or a loan donation or sale, which may be to a nonprofit or government entity, the FHFA said. NPL buyers will, therefore, be prohibited from abandoning any vacant property secured by a loan sold in an NPL pool.

Additionally, the FHFA said that the new requirements establish limits on interest rate increases in proprietary modifications after the initial modification period.

According to the FHFA, the vast majority of NPL buyers currently offer fixed-rate proprietary modifications with no possibility of payment increases over the life of the loan.

But, if a NPL buyer provides a proprietary modification that allows for an interest rate in the future, the period of the initial reduced interest rate must last at least five years and subsequent interest rate increases are limited to 1 percentage point per year, the FHFA said.

According to the FHFA, this requirement is consistent with the standard currently applicable to HAMP Tier 1 modifications and will limit excessive payment increases to borrowers and improve the likelihood of long-term home retention.

In a recent speech, Watt provided an update on the GSEs’ sale of non-performing loans and said that the FHFA will soon be releasing more data about the results of the non-performing loans, stating that the FHFA believes that the sale of non-performing loans, when done “the right way,” can help borrowers stay in their homes.

Watt said that as of the end of February, Fannie Mae and Freddie Mac sold more than 29,000 mortgages with a total unpaid principal balance of $5.8 billion through their NPL sales.

3d rendering of a row of luxury townhouses along a street

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