By Marcy Gordon -  ASSOCIATED PRESS - Article Created: 04/11/2008 02:41:58 PM PDT

WASHINGTON — Fannie Mae will allow more struggling homeowners to sell their homes for less than they owe on their mortgages in a gambit that could hit the mortgage finance company with upfront losses but stave off massive hemorrhage from foreclosures.The program by the largest U.S. financier and guarantor of home mortgages addresses homeowners with "upside-down" loans who owe more than their homes are worth. There are now an estimated 9 million U.S. homeowners in that predicament, according to Moody's Economy.com . 

Encouraged by regulators and politicians intent on keeping more homeowners from defaulting, Fannie Mae and its smaller government-sponsored sibling Freddie Mac have expanded their roles in the stricken housing market. The companies together must provide as much as $200 billion in new funding for home loans in exchange for getting their risk cash cushions reduced. The government requires them to keep a certain amount on reserve to guard against risk. Under Fannie Mae's new plan, the firms that collect payments for its mortgages will allow in more cases involving delinquent borrowers so-called "short sales" of homes for less than the amount owed on the loan. Fannie, as the mortgage guarantor, takes a hit on such sales, but can avoid the potentially larger loss from a home going into foreclosure.

"Fannie Mae's first priority is to work with our servicers to keep people in their homes," Jason Allnutt, Fannie Mae's vice president for credit loss management, said in a prepared statement. "If we exhaust our workout options, there are several ways we can help distressed homeowners avoid foreclosure, including negotiating a short sale." Washington-based Fannie Mae's plan was disclosed this week by one of its executives at a real estate industry conference. It was first reported Wednesday by American Banker, a trade publication.

Brad German, a spokesman for McLean, Va.-based Freddie Mac, said the company recently changed its policy regarding its mortgage servicers in a way that increased approvals of short sales by 90 percent between the fourth quarter of 2007 and the first quarter of this year. Late last year, Freddie Mac gave some of its servicers more authority to accept short sales without prior approval from the company, German said.

Real estate agents, meanwhile, have been frustrated by what they see as lenders' reluctance to approve short sales. A national survey of 3,000 agents conducted in March by research firm Campbell Communications found that, on average loan servicers take more than four weeks to respond to offers from would-be buyers, often resulting in a sale falling through. "There's a little tension there between the agent role and the lender role," said Brian Chappelle, a partner at Potomac Partners in Washington, a consulting firm to the mortgage industry. "It is a balancing act." He also suggested it may be difficult to distinguish between deserving borrowers who are in over their heads with a mortgage and others just trying to take advantage of the system.

The federal Office of Thrift Supervision, a division of the Treasury Department, has also drafted a plan to help such upside-down borrowers, allowing them to refinance into government-backed loans covering the home's current value. To make up the difference, lenders would receive a special certificate equivalent to the remainder of the balance owed that they could redeem if the home were eventually sold at a higher price.

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AP Business Writer Alan Zibel contributed to this report.

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Fannie warns homeowners who walk away

Kenneth Harney, Sunday, April 13, 2008

(04-13) 04:00 PDT Washington -- The country's two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing "walkaway" trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain.

On March 31, Fannie Mae sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition is for three years. Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680.

Freddie Mac, Fannie's rival, counts foreclosures as major credit blots for seven years, and a senior official said the company is now aggressively pursuing some walkaway borrowers "to preserve our deficiency rights" where permitted under state law.

The walkaway trend is particularly noteworthy in former housing boom markets – including California, Florida and Nevada - where many homeowners find themselves upside down on their loans, owing tens of thousands more than the current market value of their houses. If they invested little or nothing in down payments, some owners reason, continuing to make payments - even if they can afford to - may be throwing good money after bad.

A number of Web sites have popped up claiming to cut the hassles of bailing out of a mortgage. One company promises that clients "will be able to live in (the) home for up to eight months with no mortgage payments," after paying $895 for a customized plan. The same site says it will provide clients with "legal credit repair" to "improve your FICO scores." Another Web site claims that "your credit can be repaired and (you will) be able to purchase a house in as few as two years" - after paying a $495 fee. Still another company says walkaways can expect "up to one year living payment free" as the lender goes about filing for foreclosure. That company charges $995 for its how-to-do-it kit.

Fair Isaac Corp. of Minneapolis, developer of the FICO scores used in most mortgage transactions, is unhappy at any suggestion that a foreclosure could be minimized or wiped away in a short period of time. Its scoring model counts foreclosure as a long-standing and severe event, nearly comparable with bankruptcy, with negative consequences for all forms of credit that walkaways might seek to obtain. That includes credit card applications, auto loans, student loans - and even Fannie warns homeowners who walk away insurance and employment.

FICO spokesman Craig Watts said that the impact of a foreclosure on an individual's score depends heavily on the payment history, length and number of credit trade lines in a consumer's file, but "it is always significant."

Robin Stout Migala, consumer outreach manager for Freddie Mac, said in an interview that "there are so many bad reasons for walking away" from a home loan. Not only are borrowers' credit standings wrecked - forcing them into excessively high interest rates on any credit they can manage to obtain. But they also face other potential problems, including federal income tax liabilities.

Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven. Walkaway borrowers, by contrast, have nothing forgiven, and the IRS may demand income taxes on the balance they never paid, according to Migala.

Many borrowers facing foreclosure today have endured serious financial crises, said Migala - loss of employment, loss of an income-earning spouse, medical issues, predatory loan terms - that led to their inability to make their mortgage payments. When they apply for a loan from either Freddie Mac or Fannie Mae, she said, the standard application form asks whether they have ever experienced a foreclosure or handed over their deed in lieu of foreclosure. If applicants check "yes," the loan is immediately shifted to manual underwriting. Every piece of information is scrutinized by underwriters, who probe for the facts surrounding the loss of the house.

For borrowers who faced genuine financial hardships leading to foreclosure, underwriters are likely to be more sympathetic a few years down the road. But if you walk away, here's the deal: Don't expect to get a new home loan - certainly not one with favorable terms - for five to seven years. That's no matter what some promoter promised you online.


Residential, Construction and Commercial Lending - Meridian Financial

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