New Rules at Freddie Mac Likely to Backfire

Freddie Mac is boosting incentives to servicers as well as doubling the length of time it is giving servicers to foreclose.

Inquiring minds may wish to consider Freddie Mac Pushes Out Foreclosure Timelines.

Pressure to raise servicer spreads may have just gotten a little more intense on Thursday, with Freddie Mac (FRE) announcing a huge, mixed bag of changes to its servicing guidelines — including doubling the amount of money it pays for each workout alternative, and lengthening foreclosure timelines in key states. The GSE also said it would start reimbursing servicers for the cost of door-to-door outreach programs, and make administrative changes intended to streamline the workout process.

Perhaps the boldest move by Freddie Mac on Thursday — and one that won’t get much press attention — was its decision to eliminate foreclosure timeline compensation altogether for servicers, effective immediately. In other words, servicers will no longer earn a bonus based on how quickly they can foreclose.

If that doesn’t scream “modify more loans,” then the GSE’s decision to double compensation for servicers in completing workouts certainly will. Freddie said it will now pay servicers $800 for a loan modification, $2,200 for a short payoff or make-whole preforeclosure sale, and $500 per repayment plan. Deeds-in-lieu of foreclosure didn’t get Freddie’s same endorsement, however, and will remain at the current incentive level of $250, the GSE said.

The mortgage finance giant also said that it was increasing its allowable foreclosure timeline in 21 states to a whopping 300 days from last of date payment, and 150 days from initiation of foreclosure, effective on Friday.

For servicers, news of increased workout incentives came as welcome news; extension of foreclosure timelines, however, did not. The reason? Longer foreclosure timelines mean increased servicer advances, and given that most servicers are operating on 25 to 50 basis points in a servicing fee, pushing out reimbursement timelines means that servicers will feel the squeeze.

The GSE also revised its loan modification guidelines, eliminating a prior requirement that a mortgage must not have been previously modified; the idea here is to allow servicers the ability to re-modify a previously modified loan, and signals capitulation on data showing that many previous loan modifications aren’t sticking.

Free Rent

I was speaking with Aaron Krowne at Mortgage Lender Implode-O-Meter this weekend over a site outage (I will get to that in a moment) but we also briefly discussed "New Rules" at Freddie.

We both think that doubling the length of time to do a workout is just begging freeloaders to take advantage.Those who have made up their minds to walk away, may now be able to live rent free for 10 months before the foreclosure proceedings start.

Assume a $2,000 mortgage payment. 10 months non-payment would allow someone to save up $20,000 before walking away. That's one hell of an incentive Freddie is offering someone who is making a walk, no-walk decision.

And what's the point of huge incentives to do workouts if "previous loan modifications aren’t sticking"? One possible answer is that Freddie has resorted to praying for a miracle, and that housing picks up in 2009. An alternate answer is that Freddie may be so stuffed to the gills with foreclosures that it simply cannot handle any more.

Sorry, Freddie, there will be no 2009 recovery miracle with unemployment soaring. Nor will these workout schemes do anything but delay, at great expense, the chargeoffs.

Websites Down

On Friday I started getting reports that Mortgage Lender Implode-O-Meter was down. I was able to access the site just fine. Saturday morning I received messages that many sites were down. Here is the list.

http://ml-implode.com/
http://bankimplode.com/
http://www.nakedcapitalism.com/
http://economistsview.typepad.com/economistsview/
http://mrmortgage.ml-implode.com/
http://www.creditbubblestocks.com/
http://www.benbittrolff.blogspot.com/
http://www.financialarmageddon.com/

I tried them all and I had access. Here is the explanation from Aaron Krowne. "There was a problem with SiteMeter that is now corrected. Furthermore, the problem was only with Internet Explorer. Those who use Firefox had no problems accessing those sites."

My site was not affected because I am using StatCounter instead of SiteMeter.

I am a Firefox user, and for the record I highly recommend it. The above quirk plays no part in this recommendation. The plain fact of the matter is that my site, and many of the above sites will load faster under Firefox than IE, and Firefox offers a more secure browsing environment.

Firefox is free. Download Firefox Now if you are still on IE.

Note: This download will not overlay or affect IE in the slightest. There are a few quirky sites that require IE (Microsoft downloads being one of them) and that is about all I use IE for.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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