Fannie Mae Introduces a Principal Reduction Modification Program for Certain Mortgage Loans
As directed by its regulator, Federal Housing Finance Agency (FHFA), and jointly developed with Freddie Mac, Fannie Mae announces a new mortgage loan modification program, Fannie Mae Principal Reduction Modification. This program assists seriously delinquent underwater borrowers to recover from home value depreciation experienced as a result of the housing crisis. The Fannie Mae Principal Reduction Modification offers a one-time principal reduction on a specific subset of first-lien, non-investment property mortgage loans that are at least 90 days delinquent as of March 1, 2016, with negative equity, and have an unpaid principal balance (UPB) of less than or equal to $250,000. In addition, the mortgage loan must have a post-modification mark-to-market loan-to-value ratio that is greater than 115%. Additional eligibility requirements apply that are detailed more in Fannie Mae Lender Letter LL-2016-02.
Fannie Mae estimates that approximately 22,000 loans in its Single-Family guaranty book of business are eligible for the Principal Reduction Modification Program. Based upon the program's criteria, no loans referenced in Fannie Mae's Connecticut Avenue Securities (CAS) most recent deal, CAS 2016-C03, are eligible for this program, and based on our estimates of mark-to-market loan-to-value ratios, no loans referenced in previously issued CAS deals are eligible for this program. If a loan referenced in either a fixed severity or actual loss CAS deal is eligible for the Fannie Mae Principal Reduction Modification Program, referred to as Principal Forgiveness in the CAS program, it will be treated as follows:
- For a fixed severity CAS deal, the amount forgiven is treated as unscheduled principal and results in a prepayment to investors. If the reference loan subsequently experiences a credit event, the severity is applied per the fixed severity schedule on only the non-forgiven UPB amount, excluding any amount of UPB forgiven.
- For an actual loss CAS deal, the amount forgiven is treated as unscheduled principal and results in a prepayment to investors. There is no modification loss associated with the forgiven amount. If the reference loan were to later become a credit event, the amount of UPB forgiven would be included in the overall loss calculation.
To provide enhanced transparency, Fannie Mae includes in both its CAS monthly files as well as its historical loan performance data a field which provides the UPB amount forgiven for any mortgage loans that have experienced principal forgiveness.
For questions, market participants may contact the Fannie Mae Fixed-Income Investor Helpline at 1-800-232-6643, Option 2 or by e-mail.
Originally published: 04/14/16