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Leniency for some owners to walk away from mortgage

February 4, 2013 @ 10:15 am

Underwater borrowers who have stayed current with their mortgage payments now may be able to give up their properties and get their debts erased, according to new guidelines issued by mortgage giants 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 of foreclosure 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 mortgage erased.

"The goal is to make sure people who have suffered a hardship have the appropriate options to prevent foreclosure," said Andrew Wilson, spokesman for Fannie Mae.

Borrowers may still be required some repayment, however, if the borrower has the means to do so.

"Homeowners 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 reported 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. The GSE's have, to date, required $190 billion of taxpayer money since 2008.

"It's an extraordinarily generous approach for companies still in debt to American taxpayers," Phillip Swagel, a professor at the University of Maryland's School of Public Policy, told Bloomberg. "We're giving people an incentive to walk away, right when the housing market is starting to right itself."

But some argue that past programs tended to penalize borrowers on the brink of foreclosure who kept making their payments, said 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 mortgage 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 mortgage -- not the investor, not the homeowner, and certainly not the neighborhood."

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Comments (10)


  • Add A Comment

  • Snout wrote...
    Oh goodie!
    February 1, 2013 8:35 pm
    The last time those Fannie and Freddie started pushing buttons, pulling levers, and twisting dials things when oh so well for the rest of us who pay our bills.
    { "Thumbs Up":"1","Thumbs Down":"-1" }
  • SickofSeattleite wrote...
    dont be fooled by the deed in lieu!
    February 2, 2013 8:39 am
    Deed in lieu does not = clean slate, in many cases it is looked on just as bad as a short sale or foreclosure...just don't get evicted. Fanny and Freddy will have to lay in the beds they have made. They have single handedly screwed eligible first time homeowners(and others) by their predatory lending practices! It is an outrage and there is no consequences for them, or the govt for that matter. This just goes to show the govt can literally do WHATEVER they want with NO CONSEQUENCES!!!
    { "Thumbs Up":"1","Thumbs Down":"-1" }
  • Fuego wrote...
    Better run...
    February 4, 2013 7:01 am
    when you see the government creating new programs to "help people".
    { "Thumbs Up":"1","Thumbs Down":"-1" }
  • JadeFrog wrote...
    IRS
    February 4, 2013 11:14 am
    Don't forget, if you get debt forgiven by the banks, the IRS counts the difference as income. You might walk away from the $150k you owed on the home, but you can't walk away from Uncle Sam's cut.
    { "Thumbs Up":"1","Thumbs Down":"-1" }
  • Citizen of Krazy Town wrote...
    @jadefrog: actually that rule was suspended and the suspension renewed agin this year
    February 4, 2013 11:49 am
    Short sales do not currently get taxed as income.
    { "Thumbs Up":"1","Thumbs Down":"-1" }
  • JadeFrog wrote...
    Source?
    February 4, 2013 12:55 pm
    I wasn't aware that they passed the suspension. Do you have a source?
    { "Thumbs Up":"1","Thumbs Down":"-1" }
  • Wesley J wrote...
    Mortgage Debt Relief Act & Cancelled Debt
    February 4, 2013 5:13 pm
    Yes, the mortgage debt relief act was extended for another year. This was a part of the fiscal cliff negotations. It allows an owner occupied homeowner who has debt cancelled via short sale or foreclosure to not be liable to pay taxes on the cancelled debt. I don't think there is a strong chance it gets extended again.
    { "Thumbs Up":"1","Thumbs Down":"-1" }
  • po_guy wrote...
    What really confuses me...
    February 4, 2013 11:20 am
    is that if someone leaves their home due to being "underrwater", they still have to live somewhere and rent is no cheaper than a mortgage...so how can they win? Why not just stay in the house and make "RENT" payments instead of moving to some place that they will NEVER be able to own?
    { "Thumbs Up":"1","Thumbs Down":"-1" }
  • HLC wrote...
    Someone is going to make out like a fat rat.
    February 4, 2013 11:40 am
    It won't be the home owner you can bet on that. The taxpayer always takes it in the shorts when the government has a program.
    { "Thumbs Up":"1","Thumbs Down":"-1" }
  • Rick W7PSK wrote...
    And Guess who in the end pays for it
    February 4, 2013 1:30 pm
    Those of us not underwater and pay our mortgage on time get screwed. All because Frank and Dodd wanted "Good Loans" to those that couldn't afford it.
    { "Thumbs Up":"1","Thumbs Down":"-1" }
  • { "Thumbs Up":"1","Thumbs Down":"-1" }