|Fannie Mae and Freddie Mac will let some borrowers who kept up payments as their homes lost value erase their debts by giving up the properties.|
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. It follows a change in November that lets on-time borrowers sell properties for less than they owe, known as short sales, wiping out the remaining mortgage debt.
But the devil is in the details.
To qualify for the programs, borrowers are required to have a 55 percent debt-to-income ratio -- meaning 55 percent of their monthly gross income goes to paying debt.
And document a hardship, such as illness, for Fannie Mae and Freddie Mac to consider the deal. For a deed-in- lieu transactions, servicers must confirm the property is being left in good condition.
And, 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.
And, for either a deed-in-lieu or a short sale, the failure to pay off the full mortgage balance will be reported to credit bureaus even as the amount is forgiven. The effect on scores will be nearly as bad as foreclosures, according to Fair Isaac Corp.
Source - Bloomberg News 1/29/2013