From Bloomberg.com
By Kathleen M. Howley -
Jan 28, 2013 10:37 AM PT
Fannie Mae (FNMA) and Freddie Mac
will let some borrowers who kept up payments as their homes lost value
erase their debts by giving up the properties, helping Americans escape
underwater loans while adding to losses at the mortgage giants bailed
out with $190 billion of taxpayer money.
Non-delinquent borrowers with illness, job changes or other reasons
they need to move will become eligible in March to apply for a so-called
deed-in-lieu transaction that erases the shortfall between a property’s
value and the size of its mortgage. It follows a change in November
that lets on-time borrowers sell properties for less than they owe,
known as short sales, wiping out the remaining mortgage debt. Normally,
the lenders could pursue people to recoup their losses.
“It’s an extraordinarily generous approach for companies still in debt to American taxpayers,” said
Phillip Swagel, a professor at the University of
Maryland’s School of Public Policy in College Park, Maryland. “We’re giving people an incentive to walk away, right when the
housing market is starting to right itself.”
Previous
foreclosure-prevention
programs were designed to help only borrowers on the verge of losing
their homes, in effect penalizing those who kept paying, according to
homeowner advocates such as Julia Gordon, director of housing finance
and policy at the Center for American Progress in
Washington.
In some cases, servicers have advised borrowers to stop making their
mortgage payments to qualify for help, leading to evictions if their
applications are denied, Gordon said.
Underwater Properties
U.S. residential real estate lost about a third of its value after
home prices
peaked in 2006. The collapse of the mortgage market in 2008 sparked a
global financial meltdown and created the worst foreclosure crisis since
the Great Depression. In the last year, home prices have started to
revive. The median price of an existing home rose about 7 percent in
2012 from 2010, when it fell 5 percent from the year before.
There
are about 7 million underwater properties, worth less than the
mortgages on them, down from 11 million in 2011, according to
JPMorgan Chase & Co. (JPM) Within two years, the number of upside-down home loans could drop to 4 million, the
New York bank said.
“Fannie
and Freddie are playing catch-up, making these changes when defaults
are falling and the housing market is coming back to some extent,” said
Kurt Eggert, a professor at Chapman University School of Law in Orange,
California. “It should have happened a long time ago.”
Taxpayer Aid
Fannie Mae
and Freddie Mac have drawn almost $190 billion in taxpayer aid since
they were taken into conservatorship in September of 2008 when
investments in risky loans pushed them to the brink of insolvency.
They’ve paid a combined $50 billion in dividends back to the
U.S. Treasury. The companies own or guarantee $5.2 trillion of mortgages, more than half the outstanding U.S. home loans.
“The
government is saying you can just turn in your home and we’re not going
to come after you for the money you still owe,” said
Peter Schiff,
chief executive officer of Connecticut-based brokerage firm Euro
Pacific Capital. “Some of these are going to be people who might
otherwise have stayed in their homes and kept making payments.”
Gordon, the homeowners’ advocate, argues that while the change may be late, it’s still good policy.
‘Finally Recognizing’
The
deed-in-lieu transactions, which require homeowners to leave properties
in good condition, preserve the value of homes by preventing owners
from abandoning them to take a new job or cope with an illness, Gordon
said. Vacant and dilapidated real estate drags down values of nearby
houses, increases expenses for Fannie Mae and Freddie Mac, and reduces
the amount they’ll recover when the property is sold, she said.
“Fannie
and Freddie are finally recognizing that some people are stuck in their
homes,” she said. “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 mortgage --
not the investor, not the homeowner, and certainly not the
neighborhood,” Gordon said.
The new programs are separate from
the government’s Making Home Affordable foreclosure-prevention efforts
that require homeowners to be in or near default. The Fannie Mae and
Freddie Mac programs don’t require borrowers to be turned down for a
modification before applying, as does the Treasury-run Home Affordable
Foreclosure Alternative program, or Hafa.
Aligning Rules
The companies changed their programs in tandem to satisfy a directive from their regulator, the
Federal Housing Finance Agency, to align some of their servicing rules, said
Brad German,
a spokesman for McLean, Virginia-based Freddie Mac. While Freddie Mac
previously accepted applications from on-time borrowers, “approvals were
rare,” German said.
For either a deed-in-lieu or a short sale,
the failure to pay off the full mortgage balance will be reported to
credit bureaus even as the amount is forgiven. The effect on scores will
be nearly as bad as foreclosures, according to Fair Isaac Corp.
However, if borrowers keep current with their payments during the
process, they won’t take additional hits for delinquencies.
To
qualify for the programs, borrowers are required to have a 55 percent
debt-to-income ratio -- meaning 55 percent of their monthly gross income
goes to paying debt. To be eligible, homeowners have to document a
hardship, such as illness, for Fannie Mae and Freddie Mac to consider
the deal. For a deed-in- lieu transactions, servicers must confirm the
property is being left in good condition.
‘Appropriate Options’
“The goal is to make sure people who have suffered a hardship have the appropriate options to prevent foreclosure,” said
Andrew Wilson,
spokesman for Washington-based Fannie Mae. The company has renamed its
deed-in-lieu program, now calling it mortgage releases.
While
Fannie Mae and Freddie Mac forgive any remaining first-lien obligations,
they can’t control what the holders of second mortgages do. Last year
they said servicers can offer the owners of home equity debt up to
$6,000 to release borrowers from requirements to pay off those loans.
“The second-lien holder gets a say -- they don’t have to release the title,” said
Mark Goldman, a mortgage broker at C2 Financial Corp. in
San Diego. “It can get complicated when other people have a stake in a property.”
Fannie
Mae and Freddie Mac may require repayment of some of the shortfall
between the value of the home and the mortgage balance -- if the
borrowers have the means. Homeowners who apply for deed-in-lieu
transactions may be asked to make cash contributions of up to 20 percent
of their financial reserves, excluding retirement accounts, according
to the guidelines.
Or, they may be asked to sign a promissory
note for future no-interest repayments. The amount and terms can be
negotiated, according to the servicer guidelines.
New Job
Borrowers are allowed to have a newly originated mortgage on another property if they are moving for a
new job
or if they are in the military and moving to a new station. Also, they
can have a vacation home and still apply for assistance for their
primary residence.
“I don’t have a huge amount of sympathy for
someone who says they need help from Fannie and Freddie when they still
have a vacation home,” said
Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
Even
if borrowers pay a portion of their loan’s shortfall, it may be a
better deal than just walking away from the property. Almost two-thirds
of mortgages are held in so-called recourse states that permit lenders
to chase homeowners for the full difference between the value of their
property and the loan principal, known as a deficiency.
In
non-recourse states, many home loans are eligible for deficiency
judgments if they have been refinanced. Two weeks ago, Congress extended
a law that grants tax-free status to the forgiven portions of
mortgages, which normally would be considered income for the borrower.
“There
are lots of families who are trapped in their homes,” said Gordon, of
the Center for American Progress. “They need a way to get out.”
To contact the reporter on this story: Kathleen M. Howley in
Boston at
kmhowley@bloomberg.net.
To contact the editor responsible for this story: Rob Urban at
robprag@bloomberg.net
