Home loan market-maker Freddie Mac announced recently their plan to provide some level of relief to the victims of this national disaster who happen to be borrowers under the Freddie Mac program.
Their first step was to recognize the scope of the gulf coast disaster, and respond by donating $10 million to aid organizations supporting relief efforts, including the American Red Cross. And as time goes by and the needs of the area grow clearer, Freddie Mac promises to pursue other housing related strategies in an effort to alleviate suffering in the hurricane’s aftermath.
Perhaps on a more human level, Freddie Mac has asked its mortgage loan servicers to extend payment relief to qualified borrowers in the areas affected by the storms. This relief would extend directly to those whose homes have been either damaged or destroyed by Katrina.
A "loan servicer" is the organization to whom you send your monthly payments on your home loan. Because home loans are considered "negotiable instruments," loans are often bought and sold among lenders, and the loan servicer may or may not change as a result. But if a loan was originated through the Freddie Mac system, it remains subject to Freddie Mac regulations for its duration.
Specifically, families in areas which have been declared a Major Disaster Area by the President can seek mortgage relief which is designed to help them in two areas: their credit rating and their financial interest in their home.
The first option servicers are encouraged to consider is a short-term suspension of collection, foreclosure and eviction proceedings, so borrowers can obtain disaster relief and file insurance claims.
This is especially important while the victims of Katrina begin to sort out their lives. Many returned to find their homes gone or damaged beyond repair.
If lenders began reporting as delinquent borrowers who are simply unable to meet their commitments at this time, the borrowers credit file and credit score could easily end up seriously damaged, even if the payments were only delayed temporarily.
Freddie Mac’s disaster area policy allows servicers additional discretion to reduce or suspend home loan payments for up to 12 months. Each case must be handled on an individual basis to determine which alternative will best fit the homeowner's situation.
In addition, Freddie Mac is "strongly encouraging" loan servicers to take the following steps for borrowers in the affected area:
* Waive late fees or penalties that would normally be assessed against borrowers whose homes have been damaged by wind, flooding or fire.
The misfortune of thousands of home owners should not be a financial windfall for loan servicers, and this step prevents the borrower’s financial circumstance from worsening through penalties.
* Loan servicers are encouraged to "not report" to credit bureaus any changes in payment arrangements or suspension of payments which might otherwise be considered late or overdue.
This is simply a recognition that millions of Americans lives have been disrupted to one degree or another, and that a return to financial normalcy may take some time.
* Expedite the release of insurance proceeds.
While this last step may not seem important, it is actually a vital step in the restoration and rebuilding of affected gulf coast housing.
Last year, I experienced a relatively small fire at one of my rental houses. The insurance company was easy to deal with, but the mortgage company refused to allow one penny to be paid to anyone until the entire repair job was completed to their satisfaction.
I had to pay for almost $45,000 of repairs from of my own pocket, then file a formal request for release of the insurance proceeds. In addition, the lender made me pay for their inspector who was to decide if I got my money back or not.
Yes, I finally was reimbursed, but the manager at the "escrow servicing" department told me this experience was the best I could hope for.
Fortunately, the Freddie Mac policy should alleviate some of the difficulty normally associated with obtaining lender cooperation in the gulf coast region.
Freddie Mac Chairman and CEO Richard Syron explained "For those families who still have homes, we want to help them keep their homes. And for those families who are displaced, we hope our contributions of money and resources will help ease their burden as they get back on their feet."
Freddie Mac is a federally chartered private company which purchases home loans and resells them through mortgage related securities and debt instruments in the capital market.
A recent announcement by Fannie Mae also presented a similar program of relief for borrowers, raising hopes that most lenders would follow this lead in the disaster areas.
