Fannie, Freddie to Let Borrowers Walk

By Peter King,

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Fannie Mae and Freddie Mac will reportedly let some underwater homeowners walk away from their mortgages debt-free, beginning in March.

The deal comes with some pretty strict limitations though. To qualify, homeowners must be facing a demonstrable hardship, be current on their mortgage payments and have total debt obligations of 55 percent of their income, according to reports from Bloomberg News.

Homeowners may also be required to contribute up to 20 percent of their financial reserves, excluding retirement accounts, in order to be approved.

Interested homeowners will be able to apply for what is known as a deed-in-lieu transaction, where they surrender ownership of the home in return for having their mortgage debt wiped out. Eligible hardships include a job transfer, illness or other circumstance that forces them to move.

Homeowners will be required to turn over the property in good condition. That's a plus for the mortgage agencies, which often take further losses on foreclosures when the former owners allow the home to fall into disrepair or even vandalize it out of resentment, sometimes stripping it of appliances and other items of value out.

Goes beyond short sales

The new initiative goes a step beyond measures the two mortgage guarantors took in November to make it easier for underwater homeowners to dispose of their property through short sales, provided they are current on their payments. The big difference with the new initiative is that an underwater homeowner will no longer be required to find a buyer to purchase the property in order to get out of their mortgage.

With both the short sale and deed-in-lieu options, homeowners must take a major hit to their credit scores as the price for wiping out their mortgage debt. Those loans are reported to credit bureaus as closed but not paid in full, which can have nearly as much impact as a foreclosure on credit scores.

Fannie Mae and Freddie Mac reportedly own or guarantee more than half of all U.S. mortgages, with a total value exceeding $5 trillion. There are currently estimated to be 7 million underwater mortgages in the U.S., down from 11 million two years ago.

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This article appears in: Personal Finance Banking and Loans
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