Effective July 17, homeowners seeking to modify their Fannie Mae/Freddie Mac mortgages to avoid foreclosure will see lower interest rates. Each of Fannie and Freddie has cut its benchmark interest rate on standard loan modifications to 4%. The decrease in the interest rates does not apply to HAMP® modifications, only to standard modification loans which we shall learn more about below.
Historical Standard Modification Interest Rates
Fannie Mae and Freddie Mac can increase or decrease their benchmark interest rate on conventional standard loan modifications. This fixed interest rate is used by lenders to determine the terms of a homeowner’s standard modification trial period plan and the final modification plan.
It has been the second time this year that both GSEs cut their interest rates on standard loan modifications. In mid-January 2017, each GSE increased its standard modification interest rate to 4.250% from 3.875% prevailing in the middle of December 2016.
Then as of May 12, 2017, the benchmark interest rate was lowered to 4.125% and then most recently it has been further reduced to 4.000% effective July 17, 2017.
Standard Loan Modification for the Financially Distressed
Fannie Mae and Freddie Mac each maintain a standard modification program targeting financially struggling homeowners who want to modify their conventional mortgages to avert foreclosure. Let’s take a look at their respective eligibility requirements.
Property Type
Under both programs, owner-occupied and investment homes can be eligible for a standard loan modification. Per Freddie Mac, vacant properties may be allowed but they can’t be condemned. Fannie Mae clarifies that the property should not be condemned or abandoned per applicable law.
Mortgages
To qualify for the Freddie Mac standard modification program, the mortgage must be first-lien and owned by the GSE and originated 12 months, at least, prior to the loan modification’s evaluation date for eligibility. The mortgage may have been modified but should not be more than twice.
Fannie Mae adds that the mortgage must not have failed a Trial Period Plan under its standard modification within 12 months of its evaluation date. It must not have been previously modified and became 60+ days delinquent within the first 12 months of the loan modification effective date.
This requirement does not apply to mortgages whose prior modification was Home Affordable Mortgage Program® or HAMP® or a cash flow/surplus income. Fannie Mae also requires the mortgage to have not been modified thrice or more regardless of the loan modification program.
Borrowers
Freddie Mac requires the borrower to be (a) 60 days or more delinquent or (b) current or less than 60 days delinquent but determined to be in imminent default. It’s basically the same for Fannie Mae, which requires the delinquency to be at least 60 days or if the mortgage is current or the delinquency less than 60 days, the borrower must be found to be in imminent default.
Each standard modification program requires the borrower to show eligible hardship, excluding unemployment and temporary hardships. Each also requires a verifiable income to meet the modified mortgage payment and unemployment income is not accepted as a source of income.
Freddie Mac emphasizes that the borrower must be ineligible for HAMP to qualify for its standard modification plan, although if he/she has defaulted on a previous HAMP Trial Plan or other loan modification, he/she may still be eligible for a standard modification.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
