Fannie Mae is retiring one of its mortgage-workout options, underscoring the growing emphasis on loan modifications through a government program and reflecting how much more dire homeowners' struggles are today than a couple of years ago.
The government-sponsored enterprise told lenders late Monday that the HomeSaver Advance program would end Sept. 30. Established in February 2008, HomeSaver Advance enabled servicers to make small unsecured personal loans to troubled borrowers to bring their mortgages current.
The program was designed to help borrowers early in the delinquency cycle who may have been experiencing a temporary hardship, and to help reduce the number of delinquent loans Fannie repurchased from its securitization trusts and the losses associated with those purchases.
"It was a nice solution at one point when we thought the problem was helping people with a short-term bridge," said David Abromowitz, a senior fellow at the Center for American Progress. "Now the problem is helping people for the long term who don't see their incomes going up or their house values going up. The tools that were proposed a few years back don't fit that situation."
Though the program was successful at first in helping to reduce delinquencies in Fannie's portfolio (delinquent loans the GSE had to repurchase from securitization trusts in 2008 fell by 40.9%), problems on those mortgages resurfaced as many consumers weren't able to stay current.
Only about 22% of the loans associated with the program purchased during 2008 were current or had paid off as of nine months after the loans were granted, according to an annual filing with the Securities and Exchange Commission.
Fannie's regulator and conservator, the Federal Housing Finance Agency, expressed concern over the high redefault rate of the loans associated with the HomeSaver Advance program, saying in its annual report to Congress in May of last year that it called "into question the program's assumption that borrowers have the capacity to make payments going forward."
Fannie spokeswoman Janis Smith would not say whether the decision to end the HomeSaver Advance program had anything to do with the high redefault rate of the loans.
She said use of the program had diminished in favor of other workout options.
"There really are so many other alternatives available now that the demand for HomeSaver Advance just dramatically went down, almost down to a trickle," she said.
Smith said that the Treasury Department's Home Affordable Modification Program and other foreclosure alternatives "have been given a lot of visibility and people know to ask for them when they call their servicers."
HomeSaver Advance loans made up the biggest portion of the GSE's workouts during the year they were introduced. In 2008, Fannie purchased 71,000 of the loans. That compares with just 33,000 modifications, which includes changes to the interest rate, loan balance or loan term, and nearly 8,000 repayment plans and forbearances.
But as housing conditions worsened in 2009, and borrowers fell further and further behind on payments, Fannie shifted its focus to other types of workouts. Loan modifications nearly tripled last year and Fannie purchased only 39,000 HomeSaver Advance loans.
Despite critics' complaints that the Hamp program has been slow going, Hamp workouts have generally outperformed other loan mods. A government report in June showed that 7.7% of Hamp modifications completed in the fourth quarter of 2009 were 60 days or more delinquent, three months after the modification, compared with 11.3% of overall modifications.
Fannie Mae's current loan-workout hierarchy requires that servicers first determine whether a borrower could be eligible for Hamp. If the borrower is found ineligible for Hamp and is experiencing a temporary hardship, servicers are required to first consider a forbearance (a temporary reduction or suspension of payments) and then a repayment plan (in which the borrower agrees to pay past due amounts while still making regularly scheduled payments). The HomeSaver Advance program had been the third option.
The 15-year loans were generally for up to $15,000 or 15% of the unpaid principal balance of the delinquent first-lien loan, whichever amount was smaller.