The Fannie Mae and Freddie Mac Flex Modification Program: What You Should Know

In a loan modification, the bank agrees to alter your mortgage terms, which in turn lowers your monthly payment to a more affordable amount. If Fannie Mae or Freddie Mac owns your loan, you might qualify for a "Flex Modification," a special loan modification program.

Under this program, the loan servicer takes a series of steps, which might include reducing the interest rate and, possibly, extending the term of the loan to lower your monthly payments by as much as 20%.

Parties Involved in Mortgage Servicing

Before you can understand who or what Fannie Mae and Freddie Mac are, you first must understand the primary parties involved in mortgage servicing.

• Lender or originator. A "lender" or "originator" is the party that loaned you the money for your home loan.
• Investor. Often, the originator (the original owner of the loan) subsequently sells the loan to a new owner, who is called an "investor."
• Servicer. A "loan servicer" is the company that handles the loan account. The servicer collects monthly payments, manages escrow accounts, processes loan modification applications, and supervises the foreclosure process when borrowers don't make their payments. Sometimes, the loan owner also acts as the servicer. Other times, the owner sells the right to service the loan to another company.

Who (or What) Are Fannie Mae and Freddie Mac?

The Federal National Mortgage Association (FNMA), also called "Fannie Mae," and the Federal Home Loan Mortgage Corporation (FHLMC), also called "Freddie Mac," are government-sponsored enterprises that own or back (guarantee) many mortgages in the United States.

Here's how Fannie Mae and Freddie Mac play a role in the mortgage market: A borrower usually takes out a loan to buy a home from a bank or mortgage company. Most of the time, though, the original lender won't keep the loan. Instead, the lender sells the loan to a bank or investor, like Fannie Mae or Freddie Mac, on what's commonly known as the "secondary mortgage market." After purchasing a loan from a bank or mortgage company, Fannie Mae or Freddie Mac either keep the mortgage in their portfolio or package the loan with other loans into mortgage-backed securities, which are then sold to private investors. Fannie Mae and Freddie Mac sometimes guarantee the loans they sell to investors, meaning they make sure that an investor gets paid on the loan even if the borrower defaults.

How Flex Modifications Work

The Flex Modification program helps borrowers who have a Fannie Mae- or Freddie Mac-owned loan. This program, which replaces the now-expired Home Affordable Modification Program (HAMP) program, is supposed to reduce an eligible borrower's mortgage payment by about 20%.

With a Flex Modification, the servicer has to take one or more of the following steps to lower the borrower's payment:

• capitalize the overdue amounts ("capitalizing" the overdue amounts means adding them to the outstanding loan amount)
• adjust the interest rate
• extend the term of the loan, or
• forbear some of the principal balance. ("Forbearing" the principal means setting aside a portion of the total debt before calculating the borrower's monthly payment. The borrower typically has to pay the set-aside part in a balloon payment when refinancing or selling the home, or when the loan matures.)

Both Fannie Mae and Freddie Mac require their servicers to review all borrowers for a Flex Modification when the borrower is between 90 and 105 days behind in payments and send all eligible borrowers a trial plan offer. So, your servicer might offer you this type of modification, even if you don't apply for it. But you can also apply if a foreclosure sale hasn't happened yet. Under federal law, if you submit your complete application more than 37 days before a scheduled foreclosure sale, the foreclosure must be delayed while the application is pending.

For borrowers who are less than 90 days delinquent, the program requires a complete loss mitigation application (called a "borrower response package"). The program has a streamlined process for borrowers 90 or more days delinquent.

Before the servicer finalizes the modification, you'll have to successfully complete a trial period plan that normally lasts three or four months. If you make all the trial payments, you'll get a permanent loan modification that will likely waive previous late charges, penalties, and other fees.

Eligibility for a Flex Modification

To be eligible for a Flex Modification, Fannie Mae or Freddie Mac must own your loan. To find out if either Fannie Mae or Freddie Mac owns your loan, call your servicer or use the Fannie Mae and Freddie Mac online loan lookup tools.

Also, you, your home, and your mortgage loan have to meet specific criteria, like:

• the loan must be a conventional first mortgage
• you must have suffered an eligible financial hardship
• you must have a stable income that will support a monthly payment, and
• you must have taken out your mortgage at least 12 months before being evaluated for a Flex Modification.

The requirements to get this type of modification are rather extensive and complicated. So, call your servicer to find out if you qualify and to learn how to apply.

If you aren't eligible for a Flex Modification, you might qualify for another modification program, a forbearance, a repayment plan, or another option.

What If Fannie Mae or Freddie Mac Doesn't Own My Loan?

Even if Fannie Mae or Freddie Mac doesn't own your loan, or if you don't qualify for a Flex Modification for some other reason, you might qualify for another modification program through your servicer. Servicers and investors usually offer their own in-house, called "proprietary," modifications, as well as forbearance agreements and repayment plans to help borrowers who are behind in mortgage payments.

To learn about the different options that might be available to you, call your loan servicer.

Getting Help

If you need help working out a modification or another way to avoid foreclosure with your loan servicer, consider contacting a foreclosure attorney. A HUD-approved housing counselor is also a useful resource for information about ways to avoid foreclosure.