Banks Asked to Return Katrina Mortgages
By Aleksandrs Rozens, Business Writer
Thu Sep 8, 4:32 PM ET
NEW YORK - In what may be a first for the U.S. housing market, banks are being encouraged to return the most recent mortgage loan payments from people displaced by Hurricane Katrina.
Freddie Mac, one of two government housing agencies, said Thursday it has asked banks to return September mortgage payments already made by anyone in the stricken areas. Also, the housing agency has asked lenders to return any September mortgage payments if borrowers ask for their money back.
"It is unprecedented," said Nicolas Retsinas, at Harvard University's Joint Center for Housing Studies. "It is one more option for people who have fewer and fewer options."
"I am not aware that it has occurred before," said Douglas Duncan, chief economist at Mortgage Bankers Association. "At the end of the day, everyone hopes all the borrowers will be able to return to a home and meet their mortgage payments on time and be re-established in their housing," he said.
Duncan added that "their incentives are aligned. If the borrower loses, then the lender loses and the investors lose."
Freddie Mac made its recommendation to banks in an advisory letter. That letter was sent to 2,300 loan servicers, bank arms that collect monthly principal and interest payments.
The housing agency, based in Washington, also asked that lenders extend the length of time borrowers can forgo monthly mortgage payments, known as forbearance, to a full year.
If, for example, a mortgage payment was automatically drawn from a borrowers account, Freddie Mac has asked servicers to return that money to the borrower's bank account. If payment was made by check or by other means, Freddie Mac is asking the lender to send it back upon borrower's request. The policy applies to homes in disaster areas designated by the Federal Emergency Management Agency.
"We will follow Freddie Mac's proposed guidelines. We encourage our customers to reach out to us and contact us," said Alan Gulick, spokesman for Washington Mutual which is in the process of identifying what loans were affected by the disaster.
Fannie Mae, at midday Thursday, was unable to respond to inquiries from the Associated Press asking if it would follow by encouraging similar policies.
Freddie Mac and Fannie Mae are housing agencies created by Congress to encourage home ownership. Both sell guarantees to mortgage lenders. The guarantees of timely principal and interest payments allow lenders to resell their home loans as securities to a wide range of investors like mutual funds, central banks, insurers and hedge funds.
The new policy being encouraged by Freddie Mac applies only to loans for which it provides guarantees. So, any investors holding securities pooling Freddie Mac guaranteed home loans would not be affected by any problems borrowers encounter.
According to a Freddie Mac spokesman, servicers can suspend loan payments for the first 90 days. During that time Freddie Mac advances the monthly payments to investors holding securities backed by the loan payments.
After 90 days, lenders will decide whether to extend the forbearance period to as long as a full year.
After that first 90 days, Freddie Mac will be responsible for principal payments and bank loan servicing arms will be responsible for payment of interest on loans each month that will be passed on to investors holding the mortgage backed securities, according to a spokesman with the housing agency.
At the conclusion of the forbearance period, borrowers will have a new pay plan that will allow the borrower to catch up with their payments, according to a Freddie Mac spokesman.
The new plan could involve lengthening the life of the loan or increasing monthly loan payments.
In the case of a default, Freddie Mac will pay off the loan and absorb the loss. The housing agency will try to minimize its loss by collecting any mortgage insurance the borrower had or collecting from any flood insurance policy, a Freddie Mac spokesman said.
On Thursday the U.S. Labor Department said an estimated 10,000 workers who lost their jobs because of Hurricane Katrina filed for unemployment benefits last week, the first of what likely will be hundreds of thousands of displaced workers seeking benefits.
The Mortgage Bankers Association, an industry trade group, estimated that 360,000 single-family mortgages in the four states were affected by the hurricane and the ensuing floods.
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