The following will be effective March 1, 2013
Deed in Lieu of Foreclosures for Qualifying Underwater Mortgages
Fannie Mae and Freddie Mac announced new rules that will become effective March 1st which will provide homeowners current in their mortgages but in positions where they might be contemplating a "strategic default" with an alternative.
1- No deficiency judgment
Under the new federal program, qualifying borrowers can offer Deeds in Lieu of foreclosure on their Freddie Mac or Fannie Mae home loans and walk away from the properties without the worry of future responsibility for the deficiency adding to losses at the mortgage giants bailed out with $190 billion of taxpayer money.
2- Mortgagor does not have to be in default
Non-delinquent borrowers with illness, job changes or other reasons they need to move will become eligible in March to apply for a so-called deed-in-lieu transaction that erases the shortfall between a property's value and the size of its mortgage.
In the past, foreclosure-prevention programs were designed to help only borrowers on the verge of losing their homes, in effect penalizing those who kept paying, according to homeowner advocates such as Julia Gordon, director of housing finance and policy at the Center for American Progress in Washington. In some cases, servicers have advised borrowers to stop making their mortgage payments to qualify for help, leading to evictions if their applications are denied, Gordon said.
3- Cost to the taxpayers
Fannie Mae and Freddie Mac have drawn almost $190 billion in taxpayer aid since they were taken into conservatorship in September of 2008 when investments in risky loans pushed them to the brink of insolvency. They've paid a combined $50 billion in dividends back to the U.S. Treasury. The companies own or guarantee $5.2 trillion of mortgages, more than half the outstanding U.S. home loans.
4- What about a second mortgage?
While Fannie Mae and Freddie Mac forgive any remaining first-lien obligations, they can't control what the holders of second mortgages do. Last year they said servicers can offer the owners of home equity debt up to $6,000 to release borrowers from requirements to pay off those loans.
The second-lien holder gets a say -- they don't have to release the title. It can get complicated when other people have a stake in a property.
Fannie Mae and Freddie Mac may require repayment of some of the shortfall between the value of the home and the mortgage balance -- if the borrowers have the means. Homeowners who apply for deed-in-lieu transactions may be asked to make cash contributions of up to 20 percent of their financial reserves, excluding retirement accounts, according to the guidelines.
Or, they may be asked to sign a promissory note for future no-interest repayments. The amount and terms can be negotiated, according to the servicer guidelines.