Fannie Mae, Freddie Mac, and FHFA have created a streamlined mortgage modification, called Flex Mod, to replace HAMP for people who are having difficulty making their mortgage payment. HAMP modifications and many of the non-HAMP alternative modifications were based on the homeowner’s income. The Flex Mod streamlined modification is based on amortizing the unpaid loan balances and extending the loan term out for 40 years along with some added features including forbearance. A detailed Flex Mod description is available here. Flex Mod has the advantage of little or no documentation requirements for the homeowner and, at 90 days delinquency, the modification offer is sent automatically to the homeowner.

The question we had was “Will a Flex Mod modification that relies primarily on term extension produce a modification that is affordable for the homeowner?” Last November, National Council of La Raza, Empire Justice Center, and NHRC conducted a study comparing 89 actual income based modifications obtained by housing counseling agencies with what the homeowners would have gotten if they received an early version of the streamlined modification. Now, we have the same set of cases and they have run through the actual Flex Mod program, so that we are able to evaluate how affordable the Flex Mod modifications are.

In summary, a majority of the cases (57%) received the same or an even more affordable modification than the mod they received originally. Another 9% of the cases were affordable but off by smaller amounts, such as $9 and $15 a month. However, 34% of the cases under Flex Mod required a payment of at least $50 a month extra and 28% of the cases would have a payment of $100 a month or more, which is seriously unaffordable. And 16% of the cases in Flex Mod were ineligible because Flex Mod would produce a modified payment which is higher than the original mortgage amount. Keep in mind that all these cases qualified for a modification based on the homeowner’s income and the investor would lose more money pursuing foreclosure than keeping the family in the home making modified payments.

NHRC is recommending that FHFA, Fannie Mae, and Freddie Mac work with us to develop some triggers to refer vulnerable homeowners who are likely to get an unaffordable modification offer to housing counselors, who can collect the financial documentation, figure out an affordable modification where possible, and make a proposal through the Fannie and Freddie exception process.

A portion of the note we sent to FHFA is below:

We appreciate the work put in by Freddie Mac and FHFA to provide the loan by loan analysis…..To review the basis for the 89 cases which we are discussing, all 89 cases received a modification based on income affordability, either as a HAMP modification or a non-HAMP modification. This means that the modifications were all NPV positive and the cost of foreclosing on the mortgage would be greater to the investor than the cost of modifying the mortgage.

Looking at the data, 51 of the cases would have received a modification with an equivalent or lower monthly payment under the Flex Mod or 57%. Some of these modifications would be substantially lower, which, as is often argued, would improve the odds of success and lower the redefault rate.

Conversely, 38 cases or 43% would receive a higher monthly payment, but some of these are for small amounts between $9 and $15 a month.

However, 30 of the cases or 34% of the total cases would have an increased monthly payment of over $50 a month, which is likely to be unaffordable for many households. Twenty five cases or 28% of the total would have an increased payment of over $100 a month, which is clearly unaffordable. Some of the cases are hundreds of dollars a month over the affordability based modification payment. Fourteen of the cases or 16% were ineligible because there was no payment reduction from the original mortgage and the homeowners would actually pay a higher payment than their original mortgage amount in the Flex Mod formula.

Offering an unaffordable modification represents not only a severe hardship for the homeowners, but also a likely loss for the investor, because the cost of foreclosing would be higher than the modification.

We recognize the commitment that Fannie Mae, Freddie Mac, and FHFA have made to Flex Mod and that there is no turning back. The industry will see benefits from the streamlined, minimal documentation approach.

To address the disconnect, we propose that FHFA develop a program to identify delinquent or at risk borrowers who are likely to receive an unaffordable modification offer and develop a work around.

1. FHFA establishes a set of triggers to identify vulnerable homeowners

2. Servicers refer vulnerable homeowners to HUD approved housing counseling agencies which are specializing in delinquency and default counseling

3. Housing counselors collect income documentation, develop household budgets, provide financial capability counseling, and make an action plan.

4. Housing counselors evaluate vulnerable homeowners for a modification, which may be the flex mod proposals or, if not, a proposal for an exception. Counselors will also evaluate for sale, short sale, and deed in lieu.

5. The exception process will include interest rate reduction, increased forbearance, and principal reduction.

6. The counselor will work with servicers and the GSE to obtain a viable resolution.

We would like to continue the discussion FHFA, Fannie Mae, and Freddie Mac to address these issues.