Fannie Mae’s current role

This spring, we reported that eight bills had been introduced to wind down Fannie Mae and Freddie Mac while a bill was introduced this summer to merge the two government sponsored entities that together own or guarantee the majority of home loans in America.

President Obama himself has said that housing is the biggest drag on the economy but has not quite admitted the colossal failure that is the Housing Affordable Modification Program (HAMP) which is well known for spending taxpayer money with little return- few homeowners have actually received a modification, most end up in limbo and there are even claims of lost paperwork and stall tactics from servicers unwilling to properly execute the program. On top of the internal drama, the House approved cuts to the HAMP program, potentially ending the taxpayer involvement in the long run.

Fannie Mae has publicly proclaimed they will protect consumers while in the process of applying for HAMP or other federally funded loan modification programs.

Fannie Mae’s blatant rule breaking

Confidential records obtained by The Detroit Free Press reveal that Fannie Mae has gone against that promise by violating the government’s own rules to protect homeowners in process of applying for federally funded loan modifications. Banks were directed to foreclose on mortgages over 12 months delinquent, despite loan modification status. Free Press notes that other confidential documents they have obtained show “that Fannie Mae made clear to banks that Fannie expected a certain percentage of delinquent borrowers to lose their homes.”

The Free Press “obtained copies of more than 2,300 requests from various banks asking Fannie Mae for permission to delay foreclosure sales. These excerpts show two requests from Bank of America and Fannie Mae’s response, which reveals a directive to deny postponements when borrowers are more than 12 months delinquent, even when homeowners are negotiating loan modifications.”

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Fannie Mae spent $27,000 on a $3,000 debt

Fannie Mae has admitted in a confidential internal memo also obtained by The Free Press that they are willing to go to extreme lengths to foreclose on a home, in one case spending $27,000 to foreclose on a $3,000 debt.

To top it all off, Fannie Mae has warned lenders of the possibility “fining lenders for unauthorized foreclosure delays,” The Free Press notes.

Disastrous results

Homeowners are making decisions about their future based on rules that govern their protection during applying for a home loan modification through the government, which in itself is already an extremely daunting and nearly impossible task given HAMP’s horrific track record.

The housing sector continues to hemorrhage and any impediment to recover must be dealt with, but it is unclear how to deal with this monstrosity given that Capitol Hill is inconsistent with the future of Fannie specifically but inconsistent with housing regulation in general.

Ocwen Financial Corp. (OCN: 12.98 -0.61%) launched a new modification program to reduce the principal on a mortgage for delinquent borrowers, while compelling them to share in the future appreciation of the home’s value with the investor.

Mortgage modifications will only be available for homeowners in negative equity.

Atlanta-based Ocwen holds a $74 billion servicing portfolio after acquiring Litton Loan Servicing and HomEq. Ocwen launched the Shared Appreciation Modification program as a pilot in August 2010, a program the company believes will make a major dent in the roughly 14 million mortgages currently in negative equity, according to Moody’s Analytics.

Through the program, Ocwen will write down qualified loans to 95% of the underlying property’s market value. The amount written down is forgiven in one-third increments over three years as long as the homeowner remains current. When the house is later sold or refinanced, the borrower will be required to share 25% of the appreciated value with the investor.

“Like all modifications, SAMs help homeowners avoid foreclosure. But they also restore equity. That’s a significant benefit to the customer and, we believe, the economy and housing market. Psychologically, it’s important too,” said Ocwen CEO Ronald Faris. “Our analytics tell us that an underwater mortgage is one-and-a-half to two-times more likely to default than one with at least some positive equity.”

SAM is one of the first principal reduction programs initiated by a private company without the prodding of a government agency. Other servicers have sporadically used Hardest Hit Fund and Home Affordable Modification Program dollars to write down principal, but only in select states.

Since August, Ocwen said 79% of the borrowers accepted the offer with a redefault rate of 2.6%. Ocwen said it has regulatory clearance to push the program into 33 states.

J.T. Smith, the chief investment officer for the boutique investment bank Aristar Funding Group said there are many still unknown parts of how Ocwen will structure the modifications such as tax liens and future title issues, but granting the borrower 75% of the appreciation is “very generous.”

“This program is a win for the borrower and very, very generous of Ocwen and investors,” Smith said. “Silent seconds are a more equitable solution, so Ocwen borrowers should take these modifications and run with it.”

Consumer organizations supported the program as well. Marcia Griffin, president of HomeFree-USA, a community-based homeownership development group, called the program “visionary.”

“The homeowner benefits from a stable housing situation and the investor is positioned to share in the future appreciation of the home’s value. In addition, communities nationwide will benefit from fewer foreclosures,” Griffin said.

John Taylor, CEO of the National Community Reinvestment Coalition, said other servicers should follow suit.

“This innovative modification program offers meaningful help for underwater borrowers. The simplicity and rationale of the SAM is striking: the homeowner maintains the equity that would otherwise be lost in the foreclosure process, and servicers and investors maintain a performing asset,” Taylor said.

A spokesman for Ocwen did not immediately disclose how many borrowers the program is expected to reach.

Write to Jon Prior.

Follow him on Twitter @JonAPrior.