Mortgage Giants Making Changes On Delinquencies

Fannie Mae - long known in the home-mortgage trade as a softie when borrowers fall behind on payments - is toughening up its act in 1996. No more Mr. Nice Guy. No more automatic rate cuts for borrowers facing temporary financial problems.

But Fannie's chief competitor, Freddie Mac, is taking the opposite tack. Traditionally a hardball player on loan delinquencies, Freddie wants to boost its number of "loan modifications" - rate reductions, term extensions and other changes for people in financial distress - by a hefty 50 percent this year.

So what does that mean for the millions of American homeowners whose loans are owned by either of these mortgage giants? For starters, if your loan is owned by Fannie Mae and you fall behind on monthly payments, you are less likely this year than in the past to get an automatic approval if you ask for a permanent rate modification to help you through your crisis. Fannie plans to cut its use of such relief by as much as 75 percent this year compared with 1995.

Freddie is willing to help

On the other hand, if your loan is owned by Freddie Mac, you're more likely than in past years to be allowed to modify the terms of your mortgage in the case of a serious delinquency. If you have a major, involuntary money problem due to an illness, death of a spouse or loss of a job, Freddie will be more willing to help work out your problem than ever before.

What's going on here? Are the giants of housing finance (both companies funnel billions of dollars a year into mortgages through local lenders) changing their respective stripes? To some degree, yes. But they're both motivated by the same objective: They want to minimize foreclosures, which cost them bundles of money. Working with borrowers to resolve their problems costs them less.

Freddie Mac says it loses an average $41,000 when it forecloses on a delinquent homeowner. Fannie Mae estimates an average loss of $25,000. Freddie says it lost $700 million last year on all loan-related credit problems including foreclosures, pre-foreclosure sales and other solutions to delinquencies. Fannie Mae says it lost about $350 million in the same period.

In a recent interview, Michael Quinn, a Fannie Mae senior vice president, said a new internal study found that many of the thousands of delinquent borrowers who've received permanent rate or term modifications "didn't really have severe hardships" requiring the degree of help they got. Borrowers who were several months behind on payments, for example, were granted substantial rate cuts despite the fact that they had large equity stakes of 20 percent and 30 percent available in their homes, or suffered only temporary income problems.

In effect, Quinn said, many delinquent borrowers were allowed to refinance to a much lower rate when they "should have been able to get a home equity line" or liquidate assets to pay off their full debt.

As an alternative, according to Quinn, Fannie is now "intervening much earlier" with delinquent borrowers, and offering a variety of "temporary forbearance" solutions. Typically these allow homeowners anywhere from six months to two years to make up their missing payments. If a delinquent borrower doesn't qualify for either forbearance or a loan modification, Fannie expects to push for a "short sale" instead of a foreclosure - a sale of the house at its current value, even if the proceeds don't fully pay off the loan amount.

Relief "whenever possible'

Quinn's counterpart at Freddie Mac, Phil Comeau, says his firm wants to use forbearance relief "whenever possible" to help borrowers avoid foreclosure. But in 1996 Freddie will also greatly expand its use of loan modifications - rate and term changes - "if there is a legitimate financial hardship" that would otherwise force the borrower out of the house. The negotiated, effective rate may be the current market rate "or lower," if it makes financial sense to Freddie Mac.

Freddie Mac granted only 88 such loan modifications nationwide two years ago, said Comeau. In 1996, he projects the company will do at least 2,500. But forget a rate cut this year from Freddie if you've stopped paying your mortgage while maintaining your customary, high-spending lifestyle. Comeau says one recent, nonpaying borrower who applied for a rate cut not only turned out to have an income of $20,000 a month, but a garage full of Mercedes Benzes and a Ferrari.

"You can't still have the maid, the pool service and be sending your kids to the most expensive private schools" and expect Freddie to subsidize you with a 5 percent mortgage rate, according to Comeau.

The advice from both executives to anyone who's fallen behind: Contact your loan servicer as soon as you know you're heading for a problem, even if you haven't missed a payment yet. Caught early, the right solution for you may be a temporary forbearance or rate modification. Waiting until you're three months in the hole, by contrast, can only grease the skids to foreclosure.

(Copyright, 1995, Washington Post Writers Group)