Here's some good news for homeowners facing tough financial times: You no longer have to miss two to three months of payments before your mortgage company can modify your unaffordable loan terms.
Starting immediately, Fannie Mae - the mortgage giant with an estimated 18 million home loans in its portfolio or in mortgage bond pools it guarantees - will allow borrowers who face imminent financial difficulties to request "early workout" loan alterations, even if they've never been late.
The policy change could help thousands of people who are losing jobs or facing layoffs as the recession crunches onward. Most lenders and loan servicers have declined to intervene in mortgage problems until borrowers are 60 days to 90 days late. At that point, so-called "loss mitigation" staffs may then try to work out solutions if possible - through rescheduling of back payments, forbearance and extending the loan term, among other techniques.
Under Fannie Mae's revised approach, servicers of the company's loans nationwide will be required to inform borrowers that if they are "reasonably" certain that changes in their income will cause them to miss mortgage payments, they might qualify for an advance loan modification - before they fall behind.
Borrowers who qualify will enter into a "trial" period of reduced payments, usually for four months. If they make payments on time during the trial, the modified mortgage terms could then be made permanent.
For example, say your spouse loses a part-time source of income, and suddenly you're short $400 a month needed to make your $2,000 mortgage payment. In the past, if you called your loan servicer, you'd likely be told that long-standing rules prohibit any help to you until you have become delinquent by several months.
But by that time, you might be thousands of dollars in the hole, racking up big late-payment penalties, and well along in the process of wrecking your credit scores.
Under the new early workout concept, by contrast, Fannie's servicers can now tell you upfront: We'll try lowering your monthly payments to accommodate the $400 in missing income. If you're current on the lowered payments after a four-month trial, and your income situation has not rebounded, we'll make the change permanent.
Officials said servicers will examine the facts in each case individually, check income, credit reports and other documentation to ensure that borrowers aren't faking income shortages just to get a lower payment.
Fannie's new loan modification program puts the company in sync with a number of other large mortgage institutions that have begun reaching out to borrowers facing economic strains before they end up in serious delinquency or foreclosure.
For instance, JPMorgan Chase Chairman and CEO Jamie Dimon says he expects his company to identify and work with as many as 400,000 customers who may be in danger of missing payments. Bank of America recently announced a similar effort.
Freddie Mac, which has 12 million loan customers either in its portfolio or in mortgage bond pools it guarantees, has "for years" permitted its servicers to negotiate early modifications in some circumstances, according to spokesman Brad German, though the company has not aggressively publicized it to borrowers.
With the addition of Fannie Mae, the vast majority of major players in the mortgage market now say they offer some form of early intervention for consumers heading for defaults. But there's a big unknown here: If your servicer modifies the terms of your loan, will you stay out of trouble? Or might you fall behind again?
The jury is still out. On the one hand, some recent federal data suggest that more than half - 53 percent - of modified loans end up in redefaults within six months. Modification advocates such as Sheila Bair, chairwoman of the FDIC, argue that changes to loan terms that go deep enough to meaningfully deal with borrowers' ongoing financial problems succeed at far higher rates.
One of the country's largest servicers of delinquent subprime mortgages, Ocwen Financial Corp. of West Palm Beach, Fla., agrees. Less than one-quarter of its modifications - often involving significant cuts in interest rates and payments and sometimes even reductions in principal debt - end up redefaulting, according to Paul Koches, the company's executive vice president.
What should you do if you see trouble on the horizon that could push you into serious delinquency? Immediately contact your servicer, find out whether your loan is owned by Fannie, Freddie or another major lender, and then request an early workout.
Before foreclosures started going off the charts, substantive help in advance would have been almost inconceivable. Now it's part of servicers' marching orders.