Fannie Mae is offering to let troubled borrowers who don’t qualify for a loan modification stay in their homes as renters if they volunteer to relinquish ownership through a deed in lieu of foreclosure.
Fannie Mae’s Deed for Lease program is also available to qualified borrowers who had previously been granted a loan modification but were unable to keep up their payments.
The homes will be leased at market rates, and borrowers or tenants will qualify to stay only if they can document that rent does not exceed 31 percent of their gross income.
"This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities," said Fannie Mae Vice President Jay Ryan in a press release.
Like short sales, deeds in lieu of foreclosure allow troubled borrowers to avoid the foreclosure process, which can be expensive for lenders and damage homeowners’ credit ratings for years.
Critics say that when home prices in some markets began falling and the financial crisis took hold, many loan servicers were too slow to embrace short sales.
Instead of allowing some homes headed to foreclosure to be sold for less than what the borrower owes and forgiving the difference, lenders have often preferred to repossess them.
In the process, they have built up large inventories of "real estate owned" (REO) properties — many worth less than what prospective buyers were willing to pay in a short sale.
In its most recent quarterly report to investors, Fannie Mae said its loan servicers completed 13,086 short sales during the first six months of the year — a 26 percent increase from all of 2008. …CONTINUED
But Fannie Mae also acquired 57,469 properties through foreclosure during the first six months of the year — a 30 percent increase from the same period of 2008 — leaving it with REO inventory of 62,615 homes.
In its last quarterly report to investors, Freddie Mac said it repossessed 35,987 homes in the first six months of the year, 21,997 of those in the second quarter alone. That helped bring REO inventory to 34,699 homes, a 57 percent increase from a year ago.
Although Freddie Mac’s loan servicers nearly quadrupled the number of short sales they engaged in — from 2,083 in the first half of 2008 to 7,914 — repossessions still outnumbered short sales by nearly five to one.
Deeds in lieu of foreclosure have been even more rare.
In the first six months of this year, loan servicers working on behalf of Fannie Mae and Freddie Mac completed 1,413 deeds in lieu of foreclosure, according to an Oct. 2 report from their regulator, the Federal Housing Finance Agency (FHFA).
During that period, Fannie and Freddie’s loan servicers completed 94,458 foreclosure sales and started the foreclosure process on 543,032 homes, while completing 135,918 loan modifications and repayment plans.
(Another 290,166 repayment plans and 244,711 forbearance plans were initiated by Fannie and Freddie’s loan servicers during the first seven months of the year, plus 131,227 trial modifications under the Home Affordable Modification Program (HAMP), FHFA noted in a subsequent report. Since then, HAMP trial loan modifications of loans backed by Fannie and Freddie have accelerated, growing to 202,000 in August and 286,000 in September).
Fannie and Freddie can provide guidance only to loan servicers, delegating authority to complete short sales to them. Short sales of homes purchased with loans backed by Fannie and Freddie increased by 45 percent during the second quarter, to 11,700, as the pipeline of seriously delinquent loans increased and Freddie Mac reduced minimum net recovery rates in five high-risk states — California, Florida, Nevada, Arizona and Michigan, FHFA said.
The Obama administration announced in May that the HAMP program would be expanded to provide incentives for borrowers and lenders to engage in short sales and deeds in lieu of foreclosure (see story). Lenders are still waiting for the guidelines of that program to be released.
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