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Fannie, Freddie Give Some Relief to Foreclosed Homeowners

Fannie, Freddie Give Some Relief to Foreclosed Homeowners

Agencies Will Allow Homeowners in Foreclosure to Buy Back Properties at Market Value

Mortgage-finance giants Fannie Mae and Freddie Mac will allow homeowners who have been foreclosed upon to repurchase their homes at market value even if they owe more, reversing a policy that prohibited such transactions.

The change comes as Melvin Watt, the director of Fannie and Freddie’s regulator, has come under increasing pressure from some groups to use the companies to provide more relief to struggling homeowners.

“This is a targeted, but important policy change that should help reduce property vacancies and stabilize home values and neighborhoods,” said Mr. Watt, the chief of the Federal Housing Finance Agency.

Previously, someone who lost a home through foreclosure and wanted to buy it back from Fannie or Freddie needed to pay the full amount owed on the mortgage, even if the market value of the home was less. That was intended to take away the motivation for homeowners to intentionally default in order to get the balance of their mortgages reduced.

In effect, that meant Fannie and Freddie had two standards where they would be willing to sell properties they owned to a new buyer at market prices when they wouldn’t do so for the former homeowner.

“There’s no reason why you shouldn’t be willing to sell a home to these borrowers on the same terms that you’re willing to sell it to someone else,” said Laurie Goodman, center director of the Housing Finance Policy Center at the Urban Institute.

The old policy drew the ire of some politicians and nonprofit groups, which argued that it encouraged homes to stay vacant and hurt neighboring property values. In June, Massachusetts Attorney General Martha Coakley sued Fannie and Freddie, alleging that the policy violated a Massachusetts state law that allowed market-value sales to foreclosed-upon homeowners in some circumstances. That lawsuit was dismissed in October.

On Tuesday, Ms. Coakley said the change “is encouraging news for homeowners in Massachusetts and across the country” while adding that she hoped the regulator would move further to reduce mortgage debt for some homeowners.

Elyse Cherry, chief executive of Boston Community Capital, a nonprofit group that provides financing to foreclosed-upon homeowners to buy their homes back, called the new policy “an encouraging step in the right direction. It makes sense for homeowners and it makes sense for neighborhoods.”

However, the impact of the change could be limited. It will only apply to the 121,000 homes that Fannie and Freddie have already foreclosed on and own, a provision that’s intended to curtail any incentive for borrowers in good standing to default. That narrow scope is unlikely to quiet the drumbeat for the FHFA to make bigger changes intended to help a larger number of borrowers who owe more than their homes are worth.

Foreclosed-upon borrowers will also still need to find the cash or financing to buy the old home back at market value, a tall order for those with tarnished credit histories.

“This is a ‘feel-good’ type of policy. It’s directionally helpful to a small number of homeowners that ran into trouble, but at the end of the day, I don’t look to this to have a major policy impact,” said Clifford Rossi, a finance professor at the University of Maryland.

Since Mr. Watt took office in January, many politicians and nonprofit groups have asked that he allow Fannie and Freddie to reduce the principal of mortgages for borrowers who owe more than their homes are worth, a step that he has so far avoided taking.

At a Senate Banking Committee hearing last week, Sen. Elizabeth Warren (D., Mass.) criticized Mr. Watt for not allowing principal reduction. Mr. Watt at the hearing said that principal reduction was “the most difficult issue that I’ve faced as director.”

The new policy in effect reduces mortgage principal, albeit for a small number of foreclosed-upon borrowers. Some nonprofit groups said that Fannie and Freddie would be better served to reduce the borrower’s principal before a foreclosure.

“It would make more sense to do a mortgage modification with principal reduction earlier in the process and prevent foreclosure in the first place,” said Kevin Whelan, national campaign director for the Home Defenders League, a nonprofit that has advocated for widespread principal reduction.

A Fannie Mae spokesman declined to comment beyond Mr. Watt’s statement.

“Our ongoing practice has been to sell homes at current market price to minimize losses to Freddie Mac and maximize opportunities to stabilize home prices in communities while fostering homeownership opportunities,” said a Freddie Mac spokesman.

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