Fannie to allow some on-time borrowers to leave homes

Fannie Mae 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% in 2012 from 2010, when it fell 5% 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. 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.”

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