Government Expands Eligibility for Breaks on Mortgages

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The government offered a break to struggling homeowners Wednesday, expanding eligibility for mortgage modifications on loans backed by Fannie Mae and Freddie Mac. 

It will now be easier for borrowers suffering permanent hardships as a result of the pandemic to have their interest rates reduced under a program called Flex Modification, said the Federal Housing Finance Agency (FHFA). The FHFA supervises Fannie and Freddie, the government-sponsored enterprises that backstop loans for about 70% of all U.S. homeowners.

The new rules are the government’s latest measure to soften the blow for struggling borrowers who are facing the sunset of two pandemic-era foreclosure protections. On July 31, a ban on foreclosures on Fannie and Freddie-backed loans will expire, and in September, the clock runs out on forbearance programs that allow some borrowers to skip payments. Earlier this week, federal agencies created new protections for borrowers that require banks to make extra efforts to get borrowers into modifications before foreclosing.  

To qualify for the modifications under current rules, homeowners usually must have a loan-to-value ratio of 80% or more. But the new rules waive that requirement for eligible borrowers harmed by the COVID-19 pandemic, who would be able to take advantage of modifications regardless of loan-to-value ratio. (The loan-to-value ratio is a comparison of the outstanding balance of the loan to the market value of the home.) Flex Modification aims to reduce homeowners’ monthly payments by 20% on Fannie or Freddie-backed loans, although eligibility for the program is determined not by Fannie or Freddie, but by the company that services the mortgage

“Allowing more families to qualify for an interest rate reduction will prevent unnecessary foreclosures ...  and make sustainable homeownership a reality for more families currently living with the uncertainty of forbearance," said FHFA Acting Director Sandra L. Thompson in a statement.

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