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Buying back in: Fannie Mae, Freddie Mac modify REO sales policy

foreclosureIn what may prove to be a controversial move, the Federal Housing Financing Agency has directed Fannie Mae and Freddie Mac to alter their policies on the sale of some 121,000 foreclosed properties in their portfolios. But just how many former homeowners will be able to take advantage of the change remains to be seen.

Under the new rules, the two government-sponsored enterprises are allowing foreclosed homeowners to repurchase their former properties at fair market value, a policy that had already applied to other purchasers of foreclosed properties owned by Fannie Mae and Freddie Mac.

Previously, foreclosed homeowners seeking to buy back their properties had to pay the two companies the entire amount owed on the mortgage. That policy also applied to any third party buying the property on behalf of the foreclosed owner.

Fannie Mae and Freddie Mac will determine the fair market value. If the foreclosed homeowner still lives at the property, he or she must provide the entities access to the home for a valuation, said Stefanie Johnson, a spokesperson for the FHFA.

The timeline for evictions following a foreclosure vary from state to state, mainly depending on whether the foreclosure is judicial or nonjudicial. In North Carolina, the lender does not have to file a lawsuit to foreclose.

Fannie Mae and Freddie Mac will absorb the loss when the foreclosed mortgage-holder owes more on the mortgage than what the property is worth, Johnson said.


A policy turnaround

Resetting mortgages for foreclosed homeowners so that their payments reflect the current market value of their previous homes is a turnaround in policy, said Matthews-based foreclosure attorney Harry Marsh.

“It’s principal reduction,” Marsh said. “It’s a step in a different direction they haven’t done in the past.”

The FHFA has traditionally relied on principal forebearance, which offers changes to the terms and interest rate on a loan, as well as a deferral on principal, rather than principal forgiveness. Forebearance, the FHFA said in a letter to Congress in 2012, “has the same effect on the borrower’s monthly payment as principal reduction, but provides the investor with potential recovery. The forborne principal is paid in full or part upon sale of the property or payoff of the loan.”

At the time, the FHFA said Fannie Mae and Freddie Mac had nearly 3 million first-lien mortgages that were underwater. Principal forgiveness would require funding of almost $100 billion from taxpayers to pay down mortgages to the value of the homes, the agency said. In addition, “…our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs,” the letter said.

Fannie Mae and Freddie Mac were taken over by federal regulators in 2008 after being hit particularly hard by defaulted loans. The Treasury Department provided $189.5 billion to keep the housing giants viable. They have since repaid the bailout and continue to operate legally as business corporations with chief executive officers and boards of directors who are responsible for much of the day-to-day operations of the companies.  Both Fannie Mae and Freddie Mac trade on the over-the-counter market.

As of the third quarter, Fannie Mae and Freddie Mac owned or guaranteed 58 percent of all mortgages, Johnson said.


Reduction and stabilization

The FHFA says the rule change will help not only homeowners, but the general public.

“This is a targeted, but important policy change that should help reduce property vacancies and stabilize home values and neighborhoods,” said FHFA Director Melvin Watt. “It expands the number of potential buyers of REO properties and is consistent with the enterprises’ practice of requiring fair-market value for those properties.”

The strategy switch follows criticism from some Democrats, who called for larger programs of principal reduction for underwater homeowners. Watt, who was sworn in early this year to a five-year term as director, came under fire from U.S. Sen. Elizabeth Warren, D-Mass., at a November congressional hearing for that very reason.

“The Treasury Department has found that principal reductions could save Fannie and Freddie nearly $4 billion and help half a million homeowners stay in their home,” she said, adding there are some 5.4 million U.S. homeowners who are underwater. “It has been six years since Congress created FHFA and in all that time your agency has never, not once, permitted a family to reduce its principal mortgage through Fannie or Freddie.”

Watt responded that he was searching for a responsible way to enforce such a change.

“It’s just a very difficult issue,” he said. “Otherwise we just reduce principal for everybody across the board…is not what anybody I think is advocating for.”

When asked why the FHFA decided to change Fannie Mae and Freddie Mac’s policy at this time and if politics had anything to do with it, Johnson referred back to Watt’s statement about reducing vacancies and stabilizing home values.

Limited practical scope

Meanwhile, the scope of the policy modification may be limited. Fannie Mae and Freddie Mac say those interested in repurchasing the properties must still wait a minimum of three years after a foreclosure to be eligible to receive another loan purchased from or guaranteed by either entity.

With banks maintaining tight credit standards to guard against the risk of defaulted loans, those seeking to repurchase their former homes within three years might have to look at alternative financing.

When asked if the former owner would be relegated to applying for a nonconforming loan with a very high interest rate, Johnson said in an email: “Buyers will need to seek financing from financial institutions that are willing to originate such loans. At the same time, several nonprofit entities have expressed a willingness to work with some former homeowners facing this situation.”

“That’s easy for them to say,” Marsh said. “No one will qualify to buy a house after a foreclosure.” The FHFA restrictions, he said, on obtaining a new loan will make it impossible to help very many people.

Meanwhile, Marsh said, Fannie Mae and Freddie Mac are going to have to look further into principal reduction. He speaks of mortgage modifications where the principal is cut every year or so by waivers that reward timely payments.

“You could argue whether it’s fair or not,” he said. “Look at the neighbor whose been making double payments all his life. He gets nothing.”

The policy change is limited to Fannie Mae and Freddie Mac REO inventory of single-family homes as of Nov. 25.

Fannie Mae and Freddie Mac do not originate mortgages but buy them through the secondary market. The purchases provide liquidity to mortgage lenders, who receive cash from the government-backed enterprises that can be used for additional mortgages. Fannie Mae and Freddie Mac pool the loans they purchase into mortgage-backed securities that they sell to investors. In exchange for a fee, the entities guarantee the mortgages in case of default.

Fannie Mae and Freddie Mac are regulated by the Federal Housing Financing Agency.

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