Freddie Mac adds optional amendment for mod agreements

Freddie Mac has published a new amendment servicers can opt to add to modification agreements when the mortgages involved have temporary interest-rate buydowns.

The recently authorized change adds a required borrower acknowledgment to modification agreements when servicers use temporary interest rate buydown funds. The acknowledgment explains that those funds may be used to reduce the borrower's delinquency or the amount of debt capitalized into the modified loan. 

The update adds to earlier secondary market efforts to create guidelines that address the increased incidence of buydowns in modifications as inflation or rising interest rates have made housing payments more of a stretch for consumers.

The share of builders offering incentives like temporary rate buydowns has been running at a rate of 60% or higher for more than a year, according to a monthly housing-market index that the National Association of Home Builders and Wells Fargo publish.

Freddie Mac's new amendment for borrower disclosures addresses a key point of compliance for servicers working with loans the government-sponsored enterprises have purchased, according to Rachel Kelley, director of operations at DLS Servicing affiliate WaterfallCalc. 

"A servicer must apply any funds it holds in association with the buydown agreement to reduce the capitalization of the modification and continue to follow the buydown agreement terms," she said. "It's crucial that any documentation provided to the borrower is adjusted to account for the buydown terms where they're still applicable."

While the GSEs' flex modifications may require an application of buydown funds, Kelley noted that there is generally a prohibition around this when it comes to deferred obligations set aside for payment at the end of the loan's life.

"Fannie Mae and Freddie Mac don't allow application of buydown funds to be used in connection with a payment deferral unless it's required by the terms of the buydown agreement," she said in an email.

The increase in temporary buydown use has spurred Freddie and Fannie to add more disclosures for investors as well as borrowers. Buydowns can have an impact on prepayment speeds that can affect the performance of mortgage-backed securities.