New Policy: Fannie Mae will Penalize Borrowers who Walk Away

Seven-Year Lockout Policy for Strategic Defaulter

Fannie Mae  announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.

Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.

Troubled borrowers who work with their servicers, and provide information to help the servicer assess their situation, can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. A borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances. These policy changes were announced in April, in Fannie Mae’s Selling Guide Announcement SEL-2010-05.

Source: Fannie Mae

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New Alternative to Foreclosures

In an effort to stem the growing tide of mortgage loan defaults across the country, the federal government has come up with yet another alternative: a deed in lieu of foreclosure agreement (DIL).

The DIL offers another option to homeowners who are unable to complete a short sale or who don’t qualify for one.

The Home Affordable Foreclosure Alternative program (HAFA) is intended to encourage lenders to facilitate short sales and deeds in lieu as alternatives to foreclosure. HAFA is part of the Home Affordable Modification Program (HAMP).

A deed in lieu of foreclosure allows a homeowner to hand the house over to the bank and walk away from the property. While it would still negatively impact the home seller’s credit score, it is preferable to a foreclosure. A foreclosure can stay on the credit report for about five years; a deed-in-lieu can be wiped out in about four years.

A DIL also allows homeowners to voluntarily give up the home to satisfy the first mortgage, even if the home is worth less than the loan balance.

Among the government’s other HAMP guidelines:

* Homeowners can receive 1,500 dollars in relocation expenses at closing. This amount may be reported as income to the IRS.
* Short sale buyers can’t resell the home within 90 days of the purchase.
* The home must be the homeowner’s principal residence.
* The homeowner’s monthly mortgage payment must be greater than 31 percent of his or her gross income.
* The mortgage needs to be delinquent or default must be reasonably foreseeable.
* The unpaid loan balance must be less than 729,750 dollars for a single house or condominium.

The program started April 5 and is scheduled to go until December 31, 2012. Right now, loans that are owned or guaranteed by Fannie Mae or Freddie Mac are excluded. However, the two government-run mortgage corporations are expected to release their own guidelines shortly.

Source: Snow Anderson (writer on RealEstate.com)

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Shorter Waiting Periods for a new Mortgage after a Preforeclosure Event

Fannie Mae is changing the required waiting period for a borrower to be eligible for a mortgage loan after a preforeclosure event. The waiting period commences on the completion date of the preforeclosure event, and may vary based on the maximum allowable Loan to Value numbers (LTV) of the property and occupancy of the property.

The following describes the waiting period policy changes for Deed-in-Lieu of Foreclosures, Preforeclosure Sales and Short Sales:

• 2 years at 80% max LTV (with a 20% downpayment)
• 4 years at 90% max LTV (with a 10% downpayment)
• 7 years at LTV ratios per Eligibility Matrix

There are exceptions to the Waiting Periods for extenuating circumstances.  More information on Fannie Mae’s Announcement.


Bankruptcies
The multiple bankruptcy policy is being clarified to state that two or more borrowers with individual bankruptcies are not cumulative. For example, if the borrower has one bankruptcy and the co-borrower has one bankruptcy, this is not considered a multiple bankruptcy. The current waiting periods for bankruptcies remain unchanged.


The Desktop Underwriter® (DU®)
DU is the software that Fannie Mae uses to determine if a borrower qualifies for a mortgage. DU will be updated in June to reflect the deed-in-lieu of foreclosure policy changes outlined above. Because preforeclosure and short sales cannot be identified in the credit report data by DU at this time, DU will not be updated in June to include these policies. However, effective for loan applications dated on or after July 1, 2010, lenders will be required to determine during their review of the credit report if there is a preforeclosure or short sale and must manually apply the new policies to all loan casefiles underwritten through DU.

See the Selling Guide, B3-5.2-03, Accuracy of Credit Information in a Credit Report, for Fannie Mae’s current policies regarding the lender’s responsibility for reviewing the credit report.

Effective Date
This policy is effective for manually underwritten mortgage loans with application dates beginning July 1, 2010; for DU loan casefiles see above.

Source:  Fannie Mae Announcement SEL-2010-05

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