Underwater Mortgage Borrowers, Take Hope! New Rules Offer Debt-Erasing Features

Underwater Borrowers---Take Hope!
New Fannie and Freddie Rules
Offer Debt-Erasing Features

My friends, Bob Howe, and his lovely daughter, Katie, are lenders in Irvine. Their poignant newsletters visit some of the most pressing issues regarding housing and mortgage loans. Here are excerpts from their latest issue with some welcome news for those who are, or may soon be, underwater on their home loan. Debbie Ferrari

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Underwater borrowers who have stayed current with their housing payments now may be able to give up their properties and get their debts erased, according to new guidelines issued by housing agencies Fannie Mae and Freddie Mac.

Non-delinquent borrowers who have Fannie and Freddie-backed loans and who can document a hardship, such as an illness, job change, or other situation that requires they must move, can apply for a deed-in-lieu transaction.

Eligible borrowers also must have a 55 percent debt-to-income ratio.
Servicers will be required to confirm that the property has been left in good condition. Borrowers who are eligible will have the debt remaining between the property’s value and size of home loan erased.

“The goal is to make sure people who have suffered a hardship have the appropriate options to prevent foreclosure,” says Andrew Wilson, spokesman for Fannie Mae. Borrowers may still be required some repayment, however, if the borrower has the means to do so.

“Home owners applying for deed-in-lieu transactions may be asked to make cash contributions of up to 20 percent of their financial reserves, excluding retirement accounts,” Bloomberg reports about the guidelines. “Or, they may be asked to sign a promissory note for future no-interest repayments. The amount and terms can be negotiated.”

Fannie and Freddie’s new eligibility for deed-in-lieu of transactions has been met with some criticism, particularly at a time with the government-sponsored enterprises are still underwater themselves from steep losses the last few years.  But some argue that past programs tended to penalize borrowers on the brink of foreclosure who kept making their payments, says Julia Gordon, director of housing finance and policy at the Center for American Progress.

Mortgage servicers in some cases were even advising borrowers to stop making their housing payment so that they could qualify for more assistance. “Fannie and Freddie are finally recognizing that some people are stuck in their homes,” Gordon told Bloomberg. “There are a lot of families who need to move who can’t do it if they’re going to have debt hanging over their heads. There’s no winner when someone is forced to default on their home loan -- not the investor, not the home owner, and certainly not the neighborhood.” Source: Bloomberg