Who'd a thunk it!
Freddie and now Fannie seem to have figured out that if they actually pay servicers to do workouts and short sales they might increase their popularity with the companies responsible for handling these operations. Before going into what's wrong with these new programs, let's be positive.
At least they are trying to do something!
We'll defer discussion of the extension of time prior to filing for foreclosure till the next post. Looking at the programs by Loss Mitigation Strategy we have the following:
Fannie Mae Freddie Mac
Repayment Plans Previous Policy $200 $250
New Policy $400 $500
Workouts Previous Policy uk a $400
New Policy $700 $800
Short Sales Previous Policy uk b $1,100
New Policy $1000-$1500 c $2,200
Deeds-in-lieu Previous Policy uk a uk a
New Policy $1,000 uk a
Fees allowed Previous Policy uk a uk a
New Policy $ 0 uk a uk a
Notes: a-Previous Policy - unknown or unclea
b Previous Policy - not described, prior policy unknow
c No definition as to how fee is to be determined Repayment Plans-
Why Fannie and Freddie feel the need to offer incentives for repayment plans in the first place is a mystery. Servicers pushing repayment plans to homeowners has been widely recognized as damaging to distressed homeowners. Why would Fannie and Freddie pay incentives for these at all in the first place, much less double the incentives.
There is a small minority of homeowners for whom repayment plans are appropriate, but they are in fact the favorite alternative "offered" by servicers. As most know who assist homeowners with workouts, including many of the homeowners unfortunate enough to have had such a plan foisted on them, these repayment plans are initiated by the servicers "collections" departments.
The primary goal appears be to extract as much cash out fo the homeowner as fast as possible. The are not created to assist homeowners get over a difficult financial period. In fact, most homeowners fail to complete these plans for obvious reasons.
Don't believe it? The typical plan will require thousands of upfront payments including, attorneys fees, of arrearages and take the balance of mortgage payments in arrears , divide it by 3 or 6 and add it ot the homeowners regular payments. Servicers seem to love repayment plans.
They employ the collectors to fend off borrowers who are really seeking a reduction in their payments and treat them to manhandling by "collectors".
Workouts - Despite a lot of hype, servicers, have not had a strong track record of offering workouts. I think this is primarily because they have been very successful in pushing homeonwers into repayment plans instead.
So, increasing, strike that, creating incentives for workouts is a step in the right direction. (Apparently there were no incentive paid to servicers prior to this new policy). The way it is structured actually makes some sense, or at least it would if Fannie didn't offer more up from for repayment plans.
Apparently the servicer will be offered $200 to get the borrower signed up for the plan and an additional $500 if the borrower makes the first 3 payments.
Lender fees for workouts-The problem with workout fees from the borrowers standpoint, is that they may have difficulty coming up with the upfront fees demanded by the servicers. On the other hand, eliminating, by eliminating all lender upfront fees (not all ask for them, but certainly some borrowers can reasonably pay them) takes with one hand what was given with the other.
It might have made more sense to limit upfront fees to $1,000 or $1,500. Eliminating them entirely will undoubtedly take away the incentive for workouts for at least some Fannie loans. After all, where the lender may have previously collected $1000 to $1500, they will now only receive $200 from Fannie for getting the borrower signed up for a workout.
Freddie has doubled their incentive for workouts to $800. Again, this would make a lot more sense if no, incentive was offered for doing repayment plans.
Short Sales - Freddie has increased their incentive to $2,200 from $1,100. Hopefully non Fannie Mae Lenders will increase their incentives to servicers, too. Fannie doesn't say so, but it is hard not to conclude that they had no incentives to servicers for doing short sales previously. Now they are offering $1,000 to $1,500 to servicers doing short sales.
A little cognitive dissonance here: Fannie came out with a policy in June of this year enabling homeowners who do short sales to qualify for a new Fannie Mae loan in as little as two years. At the same time, they announced that homeowners giving deeds-in-lieu of foreclosure would have to wait a minimum of 4 years to qualify for another Fannie Mae loan.
If Fannie is clearly telling homeowners they prefer short sales to deeds, their policies for incentives to servicers should be consistent with that policy. In other words if the waiting time for a deed-in-lieu is twice as long as for a short sale, wouldn't it make sense that the incentive is at least twice as much for a short sale as for a deed-in-lieu?
After all, the reason for the distinction in the first place is that Fannie knows they lose considerably less on a short sale then they do when there is a deed-in-lieu. In fact, Freddie apparently offers no incentive at all for deeds-in-lieu.
