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, helping Americans escape underwater loans while adding to losses at the mortgage giants bailed out with $190 billion of taxpayer money.
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. Normally, the lenders could pursue people to recoup their losses.
Previous 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.
U.S. residential real estate lost about a third of its value after home prices peaked in 2006. In the last year, home prices have started to revive. The median price of an existing home rose about 7 percent in 2012 from 2010.
There are about 7 million underwater properties, worth less than the mortgages on them, down from 11 million in 2011, according to JPMorgan Chase &amp; Co. Within two years, the number of upside-down home loans could drop to 4 million, the New York bank said.
Fannie Mae and Freddie Mac have drawn almost $190 billion in taxpayer aid since they were taken into conservatorship in September of 2008. The companies own or guarantee $5.2 trillion of mortgages, more than half the outstanding U.S. home loans.
The new programs are separate from the government's Making Home Affordable foreclosure-prevention efforts that require homeowners to be in or near default.
To qualify for the programs, borrowers are required to have a 55 percent debt-to-income ratio and a hardship, such as illness.
"The goal is to make sure people who have suffered a hardship have the appropriate options to prevent foreclosure," said Andrew Wilson, spokesman for Washington-based Fannie Mae. The company has renamed its deed-in-lieu program, now calling it mortgage releases.