Fannie Mae getting tough on late loans But Freddie Mac is more lenient

Nation's Housing

March 03, 1996|By Kenneth R. Harney

WASHINGTON -- Fannie Mae -- long known in the home mortgage trade as a softie when borrowers fall behind on payments -- is toughening up its act in 1996. No more Mr. Nice Guy. No more automatic rate cuts for borrowers facing temporary financial problems.

But Fannie's chief competitor, Freddie Mac is taking the opposite tack. Traditionally a hardball player on loan delinquencies, the Federal Home Loan Mortgage Corporation wants to boost its number of "loan modifications" -- rate reductions, term extensions and other changes for people in financial distress -- by a hefty 50 percent this year.

So what does that mean for the millions of American homeowners whose loans are owned by either of these mortgage giants? For starters, if your loan is owned by the Federal National Mortgage Association and you fall behind on monthly payments, you are less likely this year than in the past to get an automatic approval if you ask Fannie Mae for a permanent rate modification to help you through your crisis.

Fannie Mae plans to cut its use of such relief by as much as 75 percent this year compared with 1995.

On the other hand, if your loan is owned by Freddie Mac, you're more likely than in past years to be allowed to modify the terms of your mortgage in the case of a serious delinquency. If you

have a major, involuntary money problem due to an illness, death of a spouse or loss of a job, Freddie will be more willing to help work out your problem.

What's going on here? Are the giants of housing finance -- both companies funnel billions of dollars a year into mortgages through local lenders -- changing their respective stripes? To some degree, yes. But they're both motivated by the same objective: They want to minimize foreclosures, which cost them bundles of money. Working with borrowers to resolve their problems costs them less.

Freddie Mac says it loses an average $41,000 when it forecloses on a delinquent homeowner. Fannie Mae estimates an average loss of $25,000. Freddie says it lost $700 million last year on all loan-related credit problems -- including foreclosures, pre-foreclosure sales, and other solutions to delinquencies. Fannie Mae says it lost about $350 million in the same period.

In a recent interview, Michael Quinn, a Fannie Mae senior vice president, said an internal study found that many of the thousands of delinquent borrowers who have received permanent rate or term modifications "didn't really have severe hardships" requiring the degree of help they got.

Borrowers who were several months behind on payments, for example, were granted substantial rate cuts despite the fact that they had large equity stakes of 20 percent and 30 percent available in their homes, or suffered only temporary income problems.

In effect, Mr. Quinn said, many delinquent borrowers were allowed to refinance to a much lower rate when they "should have been able to get a home equity line," or liquidate assets to pay off their full debt to Fannie Mae.

As an alternative, according to Mr. Quinn, Fannie Mae is now "intervening much earlier" with delinquent borrowers, and offering a variety of "temporary forbearance" solutions.

Typically, these allow homeowners anywhere from six months to two years to make up their missing payments through regular installments. If a delinquent borrower doesn't qualify for either forbearance or a loan modification, Fannie Mae expects to push for a "short sale" instead of a foreclosure -- a sale of the house at its current value, even if the proceeds don't fully pay off the loan amount.

Mr. Quinn's counterpart at Freddie Mac, Phil Comeau, says his firm wants to use forbearance relief "whenever possible" to help borrowers avoid foreclosure. But in 1996 Freddie Mac will also greatly expand its use of loan modifications -- rate and term changes -- "if there is a legitimate financial hardship" that would otherwise force the borrower out of the house.

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