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."