Borrowers for whom a loan modification or short sale is not a feasible alternative to foreclosure will soon have the option of handing their property over to the bank, regardless of whether they are current on their payments.
As of March 1, borrowers who are current on their mortgage but meet certain criteria will be eligible for a deed-in-lieu of foreclosure or "mortgage release." Mortgage giants Fannie Mae and Freddie Mac will offer loan servicers $1,500, up from $275, for every deed-in-lieu completed following the new guidelines on or after that date, and will offer up to $6,000 to second-lien holders to expedite deeds-in-lieu.
The changes are a result of a push by the Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie, to streamline servicing requirements and paperwork between the two entities. In November, short-sale guidelines that were part of the same streamlining initiative went into effect and are expected to boost short sales.
As part of the new deed-in-lieu guidelines, borrowers who are 90 days or more delinquent must be experiencing and document one of 10 eligible hardships:
- A hardship that has caused a reduction in income due to circumstances outside their control (fewer regular working hours, for example).
- A hardship that has caused an increase in housing expenses due to circumstances outside their control.
- Divorce or legal separation, or separation of borrowers unrelated by marriage, civil union or similar domestic partnership.
- Death of a borrower, or death of either the primary or secondary wage earner in the household.
- Long-term or permanent disability, or serious illness of a borrower or co-borrower or dependent family member.
- Disaster (natural or man-made) adversely impacting the property or borrower’s place of employment.
- Distant employment transfer or relocation.
- Business failure.
- Other: a hardship that is not covered above.
For mortgage loans that are current or less than 90 days delinquent, only borrowers with one of two of the hardships above would be eligible: the death of a borrower or co-borrower, or the long-term or permanent illness or disability of a borrower or co-borrower or dependent family member.
Additionally, for borrowers who are current or less than 31 days delinquent, the loan must be for the borrower’s principal residence, and borrowers’ total monthly debt-to-income ratio must exceed 55 percent in order to be eligible.
Unless prohibited by law, loan servicers will ask homeowners who have sufficient income or assets to contribute funds to cover part or all the shortfall between the outstanding loan balance and the property’s market value.
Borrowers who are eligible for a deed-in-lieu, occupy the mortgaged property and are not required to financially contribute to the deficiency can potentially receive up to $3,000 in relocation assistance. The guidelines require the property be vacant and broom swept or else the relocation assistance will be reduced by the cost of cleaning and repair, Fannie and Freddie said.
Loan servicers must conduct a property inspection and confirm the property’s vacant and "broom swept" condition before completing the deed-in-lieu.
The guidelines encourage homeowners to leave properties in good condition, "reducing the time required to list and sell properties, and potentially revitalizing neighborhoods more quickly," Freddie Mac said.
Although the guidelines will help borrowers escape underwater loans, they will also add to losses incurred by taxpayers who bailed out Fannie and Freddie to the tune of $190 billion, Bloomberg reported. Taxpayers have received $50 billion of that back.
"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."
Julia Gordon, director of housing finance and policy at the Center for American Progress, told Bloomberg that the changes will preserve home values and reduce upkeep expenses for Fannie and Freddie.
"Fannie and Freddie are finally recognizing that some people are stuck in their homes," she said. "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."