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Fannie's Change Still Won't Save Mortgage Modifications

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CNBC.com

An interesting change this week in Fannie Mae’s loan modification process has me wondering about the motivation behind it.

On Monday, the now government-controlled mortgage giant announced that it would “provide foreclosure prevention assistance as soon as a borrower demonstrates the need for help–even if a borrower is current but default is reasonably foreseeable.”

That’s a change from the previous policy, which required a borrower to have missed three full payments. Fannie is also doubling the maximum forbearance and repayment plan periods for most loans to borrowers in need of loan workouts. This is all part of its new “Streamlined Modification Program,” announced a few weeks ago.

The press release quotes Fannie’s current CEO, Herb Allison, “A borrower’s best chance of avoiding foreclosure is to get help as quickly and efficiently as possible.”

I applaud Fannie for trying to get ahead of the defaults, and I hope borrowers who don’t really need the workouts don’t waste Fannie’s time trying to get something for nothing. I fear that’s a big possibility. But I’m not a big fan of repayment plans, no matter how long they are, because I don’t think they really help most people, especially as the economy worsens and the unemployment numbers continue to rise.

Another problem is that Fannie and Freddie don't reduce principal in the course of their modifications. Negative home equity is the chief problem in refinancing and in modifications, and without bringing the value of the loan down somewhere within the range of the value of the home, the workouts or modifications are essentially doomed to fail. Very few borrowers want to spend money on something that doesn't exist.

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