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Mortgage Servicing and Loan Modifications: 7.1 Overview

Fannie Mae and Freddie Mac are the common names for two government-sponsored entities (GSEs) created by Congress to provide liquidity in the housing market by purchasing and investing in mortgage loans. Fannie Mae, more formally known as the Federal National Mortgage Association, is the largest of the two corporations and one of the biggest investors in the mortgage marketplace.

Mortgage Servicing and Loan Modifications: 7.2.1 The Servicing Alignment Initiative and CFPB Rules

The servicing alignment initiative is an FHFA-led effort to standardize and streamline the servicing of delinquent mortgages owned or guaranteed by Fannie Mae and Freddie Mac.7 The initiative sought to establish consistent policies and processes between the two corporations in several key areas: outreach and communication with homeowners; management of the foreclosure process; requirements for loan modification and other workout options; and time standards with respect to the foreclosure process.

Mortgage Servicing and Loan Modifications: 7.2.3.1 In General

The servicing alignment initiative, by design, speeds up the foreclosure process by streamlining the process and setting strict timelines. Unfortunately, a faster foreclosure process puts homeowners at greater risk of foreclosure, especially when they have submitted, and are awaiting a decision on, a loss mitigation application. The GSEs’ servicing guidelines address the problem of dual tracking, the simultaneous processing of a workout application and pursuit of foreclosure, by providing detailed requirements regarding foreclosure referral and suspension.

Mortgage Servicing and Loan Modifications: 7.3.1.1 Introduction

Simultaneously with the phasing out of the HAMP program in December 2016, Fannie Mae and Freddie Mac announced the implementation of a new Flex Modification program. The Flex Modification replaces not only the GSEs’ version of HAMP, but also the Standard Modification and Streamlined Modification that the GSEs offered in the past. In the post-HAMP world, the Flex Modification is the only form of modification routinely offered by the servicer of a mortgage loan owned or guaranteed by one of the GSEs.

Mortgage Servicing and Loan Modifications: 7.3.1.3.1 Overview

The Flex Modification provides a modification with uniform terms and with limited reliance on individual borrower financial information. A borrower who submits a complete loss mitigation application to a servicer within ninety days of becoming delinquent is eligible to be evaluated under Flex Modification terms that are slightly more favorable than the standard used for a borrower who did not apply early. The evaluation of the early application may take the borrower’s income into account, and in some limited cases this may produce a more affordable payment.

Mortgage Servicing and Loan Modifications: 7.3.1.3.2 The application for a Flex Modification

The GSEs require that borrowers complete a Uniform Borrower Assistance Form (GSE Form 710) if they wish to apply for any of the approved GSE loss mitigation options, including the Flex Modification.53 The four-page form requires that the borrower list income and expenses and answer basic eligibility questions, including designation of a hardship. The borrower must submit income documentation along with the completed Form 710. The form itself describes how the borrower must document income.

Mortgage Servicing and Loan Modifications: 7.3.1.3.3 When can the borrower apply for a Flex Modification?

A borrower is eligible to be considered for a Flex Modification when the loan is at least sixty days delinquent.62 In addition, a borrower who is current or less than sixty days delinquent can be reviewed for a Flex Modification if the borrower meets the “imminent default” standard defined by the GSEs.63 As under their prior modification protocols, the GSEs use a standardized calculator to determine whether a borrower meets the imminent default standard.64

Mortgage Servicing and Loan Modifications: 7.3.1.3.4 The trial period plan offer

When a servicer reviews a borrower for a Flex Modification after receipt of a borrower response package it relies primarily on information from its own records. This includes any property valuation estimate it has obtained. The servicer refers to the borrower’s income information in the borrower response package only when the borrower submitted the package within ninety days of default. In these cases, the servicer considers an additional step in the Flex Modification waterfall. This extra step takes into account the debt-to-income ratio for the modified payment.

Mortgage Servicing and Loan Modifications: 7.3.1.3.5 The servicer’s unilateral offer of a Flex Modification based on proactive solicitation

Review for Flex Modification eligibility is mandatory for servicers of GSE loans when a delinquency has reached ninety days. The servicer must mail all eligible borrowers a Flex Modification offer between the 90th and 105th day of delinquency.79 The servicer makes these offers without receipt of a borrower response package or other request from the borrower.

Mortgage Servicing and Loan Modifications: 7.3.1.5.1 The basic Flex Modification waterfall

A basic Flex Modification evaluation waterfall applies to all applications submitted after ninety days of delinquency and in all instances when a servicer reviews a borrower for a Flex Modification without considering information supplied by a borrower as part of an application. The basic waterfall consists of five steps. None of the basic steps consider income or other information provided by a borrower.

Mortgage Servicing and Loan Modifications: 7.3.1.5.2 The Flex Modification waterfall for borrowers who submit a complete borrower response package before they become ninety days delinquent

The Flex Modification guidelines add a sixth step for borrowers who apply for a modification before they are ninety days past due. This variation permits certain borrowers to be considered for further payment reduction correlated to their income. This reduction based on income could lower the payment below the 20% payment reduction target under the basic Flex Modification waterfall, described above. However, there are two significant limitations on this option. First, it is available only to a borrower who submits a complete borrower response package to the servicer.

Mortgage Servicing and Loan Modifications: 7.3.1.6 The Role of an Application in the Flex Modification Program

The Flex Modification program is designed to facilitate modifications without input from borrowers. Servicers conduct evaluations based on information contained in their own records and from the property valuations they obtain. The unilateral Flex Modification evaluations are mandatory during the 90-to-105-day delinquency period and discretionary up until a set time before a foreclosure sale (thirty days before a nonjudicial sale and sixty days before a court-ordered sale). Streamlined procedures have their advantages.

Mortgage Servicing and Loan Modifications: 7.3.1.7 The Interaction of the CFPB Mortgage Servicing Rules with the Flex Modification

The GSE guidelines require that servicers evaluate borrowers for a Flex Modification when a loan is between 90 and 105 days delinquent.124 A great deal rides on the assumption that servicers will conduct these reviews in all cases in a timely fashion and perform the reviews accurately. The absence of transparency at this stage can lead to a number of problems. The borrower who did not receive a Flex Modification offer at the 90-to-105 days of delinquency stage may not be aware that a review took place.

Mortgage Servicing and Loan Modifications: 7.3.4.1 GSE HAMP

Both Fannie Mae and Freddie Mac offered a version of the Home Affordable Modification Program (HAMP) through the end of 2016.145 Like the Treasury Department’s HAMP, servicers used a uniform loan modification process to provide eligible borrowers with a monthly payment targeted to thirty-one percent of their monthly gross income. All GSE servicers were required to evaluate borrowers for GSE-HAMP if they applied by December 30, 2016. The structure, requirements, and timeline of the GSEs’ programs paralleled HAMP Tier 1.

Mortgage Servicing and Loan Modifications: 7.3.4.2 Standard Modification

The Standard Modification was an option for Fannie Mae and Freddie Mac loans until the mandatory implementation of the Flex Modification. The Standard Modification had one variation for borrowers whose pre-modification loan-to-value ratio was greater than 80%, and a different set of rules when this ratio was less than 80%. The loan-to-value determination was made based on appraisal and unpaid principal balance data in the servicer’s possession.

Mortgage Servicing and Loan Modifications: 7.3.4.3 Streamlined Modification

Fannie Mae and Freddie Mac created a Streamlined Modification, which was later extended to the Treasury HAMP program, in which the servicer was required to send unsolicited offers to the borrower to receive a modification simply by complying with a trial payment plan. This program expired as of 2017, when the Flex Modification superseded all GSE loan modification programs. Under the former Streamlined Modification, a borrower did not have to submit an application or even ask for a Streamlined Modification.

Mortgage Servicing and Loan Modifications: 7.3.4.4 2MP for Second Mortgages

Fannie Mae’s Second Lien Modification Program (2MP) allowed servicers to modify a borrower’s second lien mortgage after the first lien mortgage was modified under HAMP.184 The program also was phased out with the HAMP sunset, and 2MP trial modifications were required to be converted to permanent modifications with an effective date of no later than December 1, 2017.185 As with Treasury’s second lien program, this program was structured to be a part of the Fannie Mae HAMP program; only second lie

Mortgage Servicing and Loan Modifications: 7.3.4.5 MyCity Modifications for Detroit and Cook County

Fannie Mae and Freddie Mac’s MyCity Modification was a temporary program available for borrowers in Detroit, Michigan and Cook County, Illinois.192 This program provided for automatic solicitation of borrowers with loans at least ninety days in default. Servicers solicited borrowers who were ninety days delinquent for a modification that reduced the principal and interest payment by up to sixty percent.

Mortgage Servicing and Loan Modifications: 7.4.1 General

The Fannie Mae Single-Family Servicing Guide outlines the full range of workout options for loans held by Fannie Mae.195 Workout options are divided into two classes: (1) measures for borrowers experiencing a temporary hardship and (2) measures for borrowers experiencing a permanent hardship.196 Servicers must evaluate borrowers according to Fannie Mae’s loan workout hierarchy.