As GSE Loan Mods Fall, New Fannie Mae Program Takes Off

Government entities Fannie Mae (FNM) and Freddie Mac (FRE) have pledged in recent months to do their part in tackling the foreclosure mess, largely through easing borrowers’ payments through loan modifications and unsecured loans. A new report, released Tuesday by the Federal Housing Finance Agency, highlights the role of one perhaps slightly under-mentioned program at Fannie Mae that has clearly become a staple in loss mitigation efforts among servicers. The report showed that while loan workouts, which include repayment plans and modifications, have risen steadily, the number of loan modifications across both GSEs has continued to fall steadily. Mods totaled 15,636 in the first quarter of 2008, 15,372 for the second quarter, and fell to 13,450 in the third. Given the focus seemingly placed on loan modification efforts as of late by regulators and lawmakers, the drop certainly seems out of place. Why are loan mods falling at the GSEs? The answer in this case likely comes in the form of a little-known Fannie Mae program called HomeSaver Advance. The program, which provides borrowers with an unsecured personal loan that brings their loan current, looks to have played a big part in boosting foreclosure prevention among servicers during the third quarter. In fact, since June of this year, Fannie’s HomeSaver Advance program has been by far the single largest loss mitigation program utilized by GSE-approved servicers, according to the FHFA report. Through the program, servicers — and by extension Fannie Mae — were able to report reinstatements of 1,244 loans in the first quarter, 16,658 in the second quarter and a whopping 27,277 in the third quarter. HomeSaver Advance is documented by a borrower-signed promissory note, payable over 15 years at a fixed rate of 5 percent, with no payments or interest accrual for the first six months, according to Fannie Mae’s website. Loans are capped at $15,000 or 15 percent of unpaid principal balance, whichever is lesser. According to officials at Fannie Mae, the program is designed for qualified borrowers who have fallen behind on their mortgage, but are able to resume timely payments once their loan is brought current by the advance. A review of the company’s filings with the Securities and Exchange Commission shows clearly, as well, that the GSE implemented the program and began purchasing the unsecured loans from servicers earlier this year to help slow down its purchases of bad mortgages out of MBS trusts it owned or otherwise had guaranteed. Whenever a borrower takes the HomeSaver Advance personal loan, the GSE must only purchase that loan from the servicer, instead of purchasing the entire defaulted mortgage out of a securitized trust, as is the case with a more traditional loan modification effort; the result at Fannie has been a substantial drop in reported credit costs tied to the transfer of loans out of a given pool of mortgages. During Q1 2008, Fannie purchased 10,586 delinquent loans; by Q3, after HomeSaver Advance was rolled out, that number had fallen to 3,678, according to the company’s most recent 10-Q filing with the SEC. Fannie isn’t expecting much in the way of recovery on these loans, either; the GSE had purchased approximately 45,000 unsecured, outstanding HomeSaver Advance loans with an unpaid principal balance of $301 million as of Sept. 30, 2008, but had already written off most of the money and carried the loans at just $7 million on balance sheet. It’s unclear if the program is stalling defaults, given that borrowers electing to participate in the program need make no payments on the loan for six months, while it is reported as current by the GSEs. The FHFA report also found that the pace of new foreclosures fell during the quarter, even as the number of 60+ day delinquent borrowers continued to grow at the GSEs. Loans 60+ days delinquent, including those in bankruptcy and foreclosure, increased 48 basis points between second and third quarters, reaching 2.21 percent of all loans outstanding by the end of Q3. — Paul Jackson contributed to this report. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.