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Understanding the Streamlined Modification Initiative

The Federal Housing Finance Agency (FHFA) rolled out a new simplified program to help homeowners keep their homes and avoid foreclosure. It’s called the Streamlined Modification Initiative and the program went into effect July 1st and will expire August 1st, 2015. It’s a lot like the mortgage modification programs of the last few years with one key difference – a huge reduction in paperwork.

If you’re a borrower who is at least 90 days behind on payments on a mortgage owned or guaranteed by Fannie Mae (check your loan [3]) and Freddie Mac (check your loan [4]), you’ll start to get offers from lenders to try this program. The key difference in this program is its simplicity, you simply need to make the new payments for a trial period of 3 months and then the modification is permanent. There’s no evaluation of eligibility (no need to prove hardship), there is no need for documents, no back and forth and red tape.

The only other requirements are that the loan must be at least a year old, the borrower has to be less than 24 months (the official term is 90-720 days delinquent) behind and their loan balance must be 80% or more of the home’s value (80%+ LTV). Also, if your loan has been modified at least two times before then you are not eligible.

If you are eligible, your mortgage servicer will send you a latter that details the terms of the modification as well as the trial payments. To start, you just pay the new payment. Make three payments and the modification is permanent. If you don’t make all three, you don’t get the modification.

Do the delinquent borrowers just get a free pass? Kind of. Their loan is modified by a combination of extending the terms, from thirty to forty years, and a reduction in interest rate (since interest rates are lower now). There is no reduction in principal. No free lunch.

If you asked me when I was younger, I’d be angry that people who made bad decisions were given a break like this. Not because I don’t want people to get breaks, but I felt it was unfair. And it is. But it’s unfair in a way that’s better for everyone as a whole. Do you really want foreclosure numbers up? Do you want people to be evicted from their homes? Do you want neighborhoods empty or boarded up with ugly stickers on windows and doors? The answer is no.

You want people to own their homes and have a stake in their neighborhood. You want them to take pride in their home’s appearance. The only way to do that is to keep them in their homes and if you need to do a little modification so they can take advantage of current interest rates, I’m all for it.

(Credit: Daquella manera [5])