OREANDA-NEWS. The Federal Housing Finance Agency's (FHFA) Principal Reduction Modification program announced last week may moderately raise expenses for servicers handling delinquent Fannie Mae or Freddie Mac loans but will not affect rated RMBS transactions, Fitch Ratings says. The program is a one-time offering for approximately 33,000 agency borrowers and who meet specific eligibility criteria.

Fitch believes this program may cause more distressed borrowers to contact servicers, which may raise customer service costs in the short run. Servicers may also take on higher technology costs as underwater borrowers who meet the program's eligibility criteria must receive a solicitation letter containing terms for a modification from their servicer no later than October 15, 2016. The incremental effort and expenses that servicers put forth should decline after that date and Fitch does not believe that this program will have an impact on its servicer ratings.

The impact on the residential market will be limited by several factors. General home price increases have already reduced the number of borrowers that are underwater. Also, many borrowers had previously been helped through the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Programs (HAMP). Eligible borrowers must be at least 90 days delinquent as of March 1, 2016 and the solicitation period by the servicers is mandated to end on December 31, 2016 along with the expiration of HARP and HAMP. Non-agency mortgages are not eligible for the program and Fitch-rated agency risk-sharing deals have exhibited very strong performance and low delinquencies, making those borrowers unlikely to qualify.

The Principal Reduction Modification program will make a reduction of principal available to borrowers whose mortgages' unpaid principal balances are less than $250,000 and whose mark-to-market loan-to-value (MTMLTV) ratios are higher than 115%. The borrower's debt may be modified down to a 115% MTMLTV ratio, and terms include capitalization of outstanding arrearages, interest rate reductions, and loan-term extensions to 40 years. Forbearance of principal and/or arrears could be forgiven later. If a borrower's forbearance exceeds 30% of the post-capitalization unpaid balance, the program will forbear up to 30% of principal.