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 & 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.
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," said Mark Goldman, a mortgage broker at C2 Financial Corp. in San Diego. "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.
Borrowers are allowed to have a newly originated mortgage on another property if they are moving for a new job or if they are in the military and moving to a new station. Also, they can have a vacation home and still apply for assistance for their primary residence.
"I don't have a huge amount of sympathy for someone who says they need help from Fannie and Freddie when they still have a vacation home," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
Even if borrowers pay a portion of their loan's shortfall, it may be a better deal than just walking away from the property. Almost two-thirds of mortgages are held in so-called recourse states that permit lenders to chase homeowners for the full difference between the value of their property and the loan principal, known as a deficiency.
In non-recourse states, many home loans are eligible for deficiency judgments if they have been refinanced. Two weeks ago, Congress extended a law that grants tax-free status to the forgiven portions of mortgages, which normally would be considered income for the borrower.
"There are lots of families who are trapped in their homes," said Gordon, of the Center for American Progress. "They need a way to get out."
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