Fannie Mae has established a mortgage loan modification program to help consumers avert foreclosure at the very first signs of trouble.

A day late and a dollar short-that's the best way to describe the federal government's anti-foreclosure efforts to date. Fortunately for at-risk homeowners, times may be changing. The government-controlled Fannie Mae recently announced a program that will allow mortgage servicers to make mortgage loan modifications before the homeowner gets buried under past-due balances and late charges.

Loan modifications, an exclusive club

It's been a dilemma for the feds ever since the subprime mortgage crisis first appeared: how do you decide which homeowners should receive government assistance? Some mortgage borrowers came by their problems honestly; maybe they didn't understand their loans, or their lenders promised to refinance before the payments increased. Other borrowers threw caution to the wind, and simply purchased homes that they couldn't afford. Still another group is eager to receive assistance, because they want to pay less every month-but not because they need to.

This dilemma has kept the standards for receiving assistance relatively tight. Up until recently, Fannie Mae-one of the country's largest mortgage companies-wouldn't let a borrower proceed with a modified refinance unless that borrower had already defaulted on his loan.

Fannie lets her hair down

In mid-December, Fannie Mae made a game-changing announcement: the mortgage company will now allow borrowers to request a loan modification before any payments have been missed. The program, entitled Early Workout, requires borrowers to indicate why they need the modification. Early Workout is expected to help those who've experienced a change in income associated with a layoff or reduction in hours worked.

Loan modification example

Consider a hypothetical two-income family, the Joneses. Say, for example, that Mr. Jones loses his job. Without Early Workout, the couple would rely on Mrs. Jones' income plus savings to stay current on their loan. They wouldn't be eligible for a loan modification until after their situation had deteriorated so badly that they were no longer making those mortgage payments.

Under the terms of Early Workout, the Joneses can now approach the mortgage servicer and request a modification as soon as Mr. Jones gets his pink slip. If Fannie Mae controls the mortgage and the family qualifies, the servicer can effect an immediate-but temporary-payment reduction. The modification can be made permanent only after the Joneses stay current on the modified mortgage for at least four months.

Borrowers who experience an income change should notify their mortgage servicer immediately. Now that Fannie Mae has Early Workout, there's a good chance the borrower will have access to some type of modified refinance program. Other major mortgage loan companies, including Freddie Mac, will also authorize early workouts under certain circumstances.

At this stage of the game, mortgage lenders, mortgage investors, and lawmakers are eager to do what it takes to halt the foreclosure crisis. It's still a day late and a dollar short, but hopefully, progress will soon be made.

Published on March 4, 2008