Helping Homeowners: Which Solution Works Best?
At Freddie Mac, we operate a large business line called the Single Family Credit Guarantee business. Here, we purchase home loans from mortgage lenders, issue mortgage-backed securities backed by our credit guarantee, and manage the economic life cycle of individual loans. Our business activities are numerous and varied. But from their initial design to their market implementation, we ask the same questions:
- Do our credit policies and mortgage practices advance responsible lending?
- Do our mortgage products and securities provide essential liquidity to the residential mortgage market while compensating us for the risk?
- Do our portfolio management activities sustain homeownership, where possible, for those in financial distress?
These principles drive our business. They also reflect the public mission in our congressional charter. And together, they have led Freddie Mac to take on a greater role in the current economic crisis. Indeed, the Obama Administration has asked us to help stabilize mortgage markets and, in effect, use the infrastructure and distribution system of Freddie Mac to implement specific initiatives on its behalf. We have responded enthusiastically by making them a top corporate priority.
Rather than implementing Administration initiatives outside our normal functions, we have integrated them into our core business, producing a more powerful range of mortgage options for consumers. Let me explain how we have done this, and what benefits have been produced.
During the economic crisis, much of our single-family business activity has involved helping homeowners to manage existing mortgage obligations and costs. We do this through a combination of loan refinancing and loan modification programs. Depending on the homeowner's individual circumstances, we provide a continuum of solutions to reduce mortgage costs. Which option is the best fit?
Let's begin with homeowners whose credit profile meets our standards, have sufficient home equity, but whose mortgage rate is higher than the current market rate. Here, refinancing is the most widely used option. And for good reason: mortgage rates are near historic lows, and refinancing produces an immediate and permanent reduction in mortgage payments. Last year, through our traditional mortgage products, Freddie Mac refinanced $344 billion in home loans for 1.6 million families. The cost savings to homeowners were substantial: an estimated reduction in mortgage payments of $2,600 annually, on average. Put another way, our traditional refinancing produced an estimated $4.13 billion in economic relief for homeowners. Even better, this stimulus repeats itself year after year.
But what about homeowners whose houses are worth much less today than when they took out their original mortgage? Normally, some of these homeowners would not qualify for refinancing, or if they did only at unfavorable terms. This is where an Administration initiative, the Home Affordable Refinance Program (HARP), applies. Last year, we developed a new offering, the Freddie Mac Relief Refinance MortgageSM, for a targeted set of homeowners: those whose loans are owned by Freddie Mac and are current in their payments, but whose home equity is low or even negative. As we have seen during this decade, house prices can fluctuate wildly. But unlike some who walk away from their mortgage obligations – a practice known as strategic defaults -- most responsible homeowners pay their mortgage regardless of current property values.
For these homeowners, our Relief Refinance Mortgage is a good fit. Here, we refinance high-balance loans. Indeed, the amount still owed on a mortgage can exceed the current value of the home by as much as 25 percent. Importantly, we do not require new or additional mortgage insurance. For example, take a homeowner who put more than 20 percent down on an original mortgage and did not purchase mortgage insurance. If current property values have driven down the equity position to less than 20 percent, or even negative equity, we do not require the homeowner to purchase mortgage insurance on the refinanced loan.
We launched the Relief Refinance Mortgage in the second quarter of 2009, and finished the year refinancing $35 billion of loans for 170,000 families. The estimated annual cost savings: about $2,200 per homeowner, on average, or $368 million in total. Waiving mortgage insurance requirements produced additional cost savings. We even found that homeowners with adequate home equity used this product as well. Relief Refinances have steadily climbed in our monthly reports and represent a growing percentage of our refinances.
All this is well and good for homeowners who qualify for refinancing. But what about homeowners who do not? In other words, families who have lost some or all income, suffered a medical crisis, or experienced another event that prevents them from paying the mortgage? Unfortunately, in an economy where the unemployment rate has touched 10 percent, too many families have found themselves in this situation. Throughout the United States, there are roughly five million homeowners who have missed at least three consecutive monthly payments and/or face imminent default. Freddie Mac guarantees or owns less than 10 percent of these loans. For these homeowners, we provide an array of options to help them avoid the cost and stigma of foreclosure.
Our first option comes from the Administration: the Home Affordable Modification Program (HAMP), which was rolled out in the second quarter of 2009. HAMP is suited for homeowners who have suffered a long-term reduction in income. The loan modification reduces mortgage payments to as low as 31 percent of monthly income through a combination of reducing mortgage rates, lengthening the loan term and/or deferring principal. Under HAMP, homeowners must make three consecutive payments at the new, lower level before the modification becomes permanent. This trial period helps ensure that a sustainable alternative is in place. At year-end 2009, 129,000 homeowners with existing Freddie Mac loans were in this trial period, and 14,000 had their modifications made permanent.
What if homeowners do not qualify for HAMP or fail to make it through the trial period? Here, we turn to our traditional foreclosure prevention options. These include other forms of loan modification or forbearance plans that allow homeowners to skip several payments before completing a permanent modification. In 2009, Freddie Mac used these options to help 120,000 families stay in their homes. When even these options do not work, and the homeowner simply cannot afford to hold on to the property, we still make it possible to avoid foreclosure. For example, last year we arranged for the pre-sale of houses for 23,000 families.
Of course, modifying loans requires regular contact with the homeowner. However, many families in need do not reach out to their mortgage Servicers because they believe the process will be too intimidating or confusing. That's why Freddie Mac has invested significant resources to reach as many homeowners in need as possible. We have done so both inside and outside of our lender network. For example, we have:
- Launched a nationwide telephone help network for homeowners
- Opened help centers in four major cities with non-profit housing counselors
- Dramatically expanded our in-house servicing and call center staff
- Placed loss-mitigation specialists on site at key Servicers
- Redesigned the FreddieMac.com home page to highlight a tool that enables consumers to easily determine whether Freddie Mac owns their loan
Our commitment is clear: we want to work with struggling families to help them avoid foreclosure.
I hope this discussion gives you better perspective on the options available to homeowners seeking to manage their mortgage expenses. At Freddie Mac, we have long-standing refinancing and loan modification programs. And we have integrated the Administration's programs into our core business to maximize their effectiveness. Combined, they provide a broader continuum of options for homeowners seeking mortgage relief. More than two million families benefited from our efforts in 2009. We are working hard to assist additional families in 2010.
*Don Bisenius left his position as executive vice president of Freddie Mac's Single Family Credit Guarantee Division in March 2011.
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