GSE Flex Modification Enhancements for Sustainable Homeownership
Written by: Heather Papows, Senior Loan Servicing & Secondary Market Consultant
Why This Matters: Servicers of Fannie Mae and/or Freddie Mac portfolios need to be aware of the changes to flex modification guidance that goes into effective December 1, 2024.
Last week, Fannie and Freddie jointly announced an enhancement to their Flex Modification guidance at the direction of the FHFA, which is aimed at improving homeownership retention by further reducing payment reductions for borrowers facing long-term or permanent hardships.
The enhancement requires that servicers determine if the post-modification mark-to-market loan-to-value (MTMLTV) ratio is greater than or equal to 50%, and then evaluate a series of flex modification terms to achieve over a 20% P&I payment reduction. It is interesting to note that the payment reduction target is not considered met if the reduction is less than or precisely equal to 20%, but very specifically must stop at your first instance of surpassing 20% (for example, 20.01%). These flex modification updates go into effect on December 1, 2024, with servicers encouraged to begin implementing as early as November 1st.
With the flex modification, servicers of borrowers that meet the eligibility criteria can capitalize acceptable arrearages and work through the waterfall of steps to determine the modification terms. These steps include first reviewing and potentially adjusting the interest rate, based on the MTMLTV ratio, and keeping in mind the Fannie/Freddie Modification Interest Rate and potential ARM loan lifetime cap limitations. If a P&I payment reduction of 20.01% or greater was not achieved through rate reduction, servicers would move on to evaluating based on a term extension of up to 480 months from the modification effective date. If servicers exhaust these steps and still have not achieved the reduced payment target, a final step allows for a principal forbearance in the amount necessary to attain the target reduction, due and payable at payoff.
Since the inception of the Flex Modification workout option in 2017, this program has allowed over 500,000 borrowers to achieve meaningful payment reductions as a home retention solution. Despite a challenging economic environment, evolving this guidance is aimed to equip servicers with the ability to provide more equitable access to workout options for borrowers facing eligible hardships.
If you have questions on rolling out this or other GSE default management guidance, or would like to discuss training opportunities, please reach out to our Director, Bill Dolan at wdolan@scapartnering.com or by phone at (617) 694-2617. Prepare yourself or your team with the knowledge and skillset that will be necessary to successfully offer loss mitigation options for your borrowers when the time comes!
Sources:
