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Quite apart from financial losses, the massive foreclosures of the past few years pose another, long-term problem for the mortgage industry: fewer potential borrowers.
March 22
Fannie Mae has decided that certain distressed borrowers who agree to give up their homes as an alternative to foreclosure should get a second chance at homeownership sooner.
The policy change, announced Wednesday, is meant to reward borrowers for cooperating with their loan servicers and to support the housing market.
The government-sponsored enterprise told lenders that for borrowers who grant a deed-in-lieu of foreclosure, it will shorten the minimum waiting period to be eligible for a new Fannie mortgage. Currently such consumers must wait at least four years. Beginning with applications submitted July 1, the period will drop to two years, provided the borrower puts at least 20% down on the new home.
Credit experts called the change an acknowledgement that borrowers who work with their lenders are better risks than those who simply mail in the keys.
"It makes sense to be a little bit kinder to borrowers who have made an effort to do something about the loan and did not just walk away and say it was the lender's fault," said John Ulzheimer, the president of consumer education at Credit.com Inc., a lead generator. "Someone who fights to complete a short sale is likely to be a continuing strong credit risk going forward if they are not saddled by a disadvantaged mortgage."
Still, the change is not a giveaway. Fannie also set stricter parameters for borrowers who have tried to rehabilitate themselves. If they can make only a 10% down payment on the new home, the wait period remains four years after granting the deed-in-lieu.
Fannie officials would not discuss the changes beyond the lender bulletin, which said the GSE's goal was "to support overall market stability and reinforce the importance of borrowers working with their servicers when they have difficulty repaying their debt."
The announcement comes on the heels of the Obama administration's Home Affordable Foreclosure Alternatives program, which began April 5. It aims to streamline the complicated processes of short sales and deeds-in-lieu. The program is aimed at homeowners who do not qualify for a loan modification and industry experts expect a dramatic increase in such "preforeclosure actions" this year and next.
In a short sale, the home is sold for less than is owed on the mortgage and the lender accepts a discounted payoff.
Mortgage lenders have expressed concern that a dearth of homebuyers will cripple a housing recovery. At least 6 million homeowners have gone through a foreclosure in the past three years and another 3 million are expected to this year, according to RealtyTrac Inc., an Irvine, Calif., data tracker.
Such borrowers are essentially shut out of the housing market because, with a foreclosure in the last five years showing up on their credit report, they are not eligible for loans that can be sold to Fannie and Freddie Mac.
"People in trouble don't really understand the credit system," said Rayman Mathoda, the president and chief executive of AssetPlan USA, a Long Beach, Calif., firm that arranges short sales. "From a credit standpoint, a short sale, a deed-in-lieu and a foreclosure are all the same thing."
Mathoda has teamed up with other mortgage executives to lobby the Treasury Department and the GSEs to adopt a plan, called Second Chance, that would give a wide range of borrowers who have lost their homes the chance to be rehabilitated after two years if they undergo credit counseling. "A short sale is a proactive resolution to a credit problem, while a foreclosure is reactive," she said.
