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% debt-to-income ratio -- meaning 55% 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.
“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% 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.
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.”