Freddie Mac and Fannie Mae to allow underwater homeowners to walk away

Eligible homeowners who owe more on their home than it is worth may be able to get out from under their loan.

Freddie Mac headquartersFannie Mae and Freddie Mac, the government enterprises that guarantee more than half of the outstanding home loans in the United States, recently announced they will allow borrowers current on their mortgage payments to walk away from underwater homes through deed-in lieu transactions.

An “underwater” mortgage means the homeowner owes significantly more than the current market value of the property.  Many Michigan homes currently meet this qualification.

In a deed-in lieu transaction, the property owner voluntarily transfers ownership of their property to their lender in exchange for the lender canceling the loan. Non-delinquent borrowers with illness, job changes or other reasons to move will become eligible to apply for a deed-in-lieu transaction, which eliminates all or part of the shortfall between a property’s value and the size of its mortgage.  An application and some documentation need to be sent to the lender to start the process.

In order to qualify for the program, homeowners must be currently dedicating 55 percent of their monthly income to debt financing and provide evidence of an involuntary hardship. Lenders must also confirm the property is being left in good condition for the transaction to proceed.  For more information, read Fannie Mae’s explanation of its program and Freddie Mac’s explanation of its program.

To look up who owns your loan, go to this database from Fannie Mae or this database from Freddie Mac. If your mortgage loan is owned by someone other than Fannie or Freddie, you would need to contact your lender about any programs it might offer.

This extension of aid to underwater homeowners who have continued to make their mortgage payments follows the enterprises’ decisions last August to allow non-delinquent borrowers with loans secured by Freddie and Fannie to pursue short sales. These two enterprise initiatives have been welcomed by borrowers who have remained current on their loans despite depressed home values. This group was not extended aid by the vast majority of government programs established as the housing crisis began, most of which required homeowners to be delinquent on their payments in order to secure aid.

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 Corporation. However, if borrowers keep current with their payments during the process, they won’t take additional hits for delinquencies.  For tips on building back credit scores, go to Michigan State University Extension’s Mi Money Health credit page.

The reception of the new rule amongst other stakeholders has been mixed. The timing of the development has been questioned given the fact that the national total of underwater properties has recently been declining as the housing market strengthens.

Phillip Swagel, a professor at the University of Maryland’s school of Public Policy, characterized the program as “an extraordinarily generous approach for companies still in debt to American taxpayers,” which gives “people an incentive to walk away, right when the housing market is starting to right itself.”

In contrast, Julia Gordon, director of housing finance and policy at the Center for American Progress in Washington, praised the new rule as overdue but vital.

“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.

MSU Extension offices in or near Macomb, Washtenaw, Lapeer and Ionia counties have housing counselors you can talk to for free and assist you in the application process.  In other areas, find a housing counselor via the Michigan State Housing Development Authority.

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