Fannie Mae


Effective November 1, 2012, there are new guidelines for all Fannie Mae and Freddie Mac short sales.  The new program, dubbed the Standard Short Sale /HAFA II requires Fannie and Freddie servicers to manage short sales under one uniform process.  It is anticipated that this new streamlined process will make short sales faster, easier and more accessible to underwater borrowers.   Under the new program:

  • Homeowners do not need to be delinquent on their mortgage payments if they meet other hardship criteria.
  • Deficiency judgments will be waived in exchange for a cash contribution from certain qualified homeowners.
  • Military personnel who are relocated will automatically be eligible.
  • Up to $6,000 will be offered to  2nd lien holders to speed the process.

The new hardship criterion includes:

  • Death of a borrower or  co-borrower
  • Divorce
  • Unemployment
  • Disability
  • Relocation for a job

The good news is that this program should allow more homeowners to participate in a short sale and get out of a negative equity situation, even if they are not delinquent on their mortgage.  The bad news is that even with no missed payments; their credit will suffer as they will have settled their mortgage debt for less than the amount owed.  In the world of credit reporting, a short sale is a short sale, whether or not there was ever a missed payment or a Notice of Default recorded.

Overall, HAFA II should allow more homeowners to take advantage of a short sale and standardized processing can’t help but improve the whole experience for everyone involved.  As a Realtor who lists and negotiates short sales, I welcome anything that will streamline the often cumbersome and lengthy process.

If you live in San Diego County and are considering a short sale, or if you’re an agent looking to out-source negotiation, please call me for a confidential no-obligation consultation.

Over the past few years as home values have taken a nose dive, we’ve witnessed a new group of borrowers in the default arena – enter the strategic defaulter.  A strategic default occurs when a borrower who is financially able to make their monthly mortgage payment, chooses to walk away from their property because they owe more than the home is currently worth.  The rationale is that it doesn’t make financial sense to continue to pay for negative equity, waiting and hoping that the home’s value will increase and they will re-coup their lost equity.

To banks that are already struggling to cope with the thousands of borrowers who are legitimately unable to make their mortgage payments, this group represents a growing challenge.  According to studies by the Chicago Booth School of Business, strategic defaults in September 2010 represented 35% of all defaults, up from 26% in March 2009.  Last year the problem became so large that Fannie Mae announced that it would seek stringent penalties against borrowers who are able to pay, but choose to walk away.

Hoping to stem the tide of strategic default, banks are looking for ways to identify those borrowers most likely to walk away from their mortgage obligations.  The problem however, is that to date there has been no reliable way to identify the potential strategic defaulter.  Intervention is impossible if you don’t know who you’re looking for.

FICO Research Labs may have developed the tool banks are lacking.  The credit assessment company announced that it has developed a method that analyzes consumer spending and payment habits and allows lenders to identify borrowers who are 100 times more likely to default than others.  

So what is the profile of the strategic defaulter?  They are actually quite savvy managers of their credit having higher FICO scores, lower balances on revolving debt, less retail credit usage, and fewer instances of exceeding credit limits than the general population.  FICO claims the company’s new analytics can provide loan servicers with a method of reaching two-thirds of these would-be strategic defaulters, and according to Dr. Andrew Jennings, head of FICO Labs, “The ability to spot likely strategic defaulters before delinquency enables servicers to intervene early.”

But then what?  It is one thing to identify borrowers who might choose strategic default, but, what intervention can banks offer that will actually deter would-be defaulters? If lenders follow Fannie Mae’s example and simply threaten legal action to recoup outstanding mortgage debts, I doubt that will be much of a deterrent or solve any of the real problems.

The issue comes back to a point I’ve often made in this blog:  I don’t believe we are going to see a significant reduction in defaults, both strategic and involuntary until lenders are ready to consider meaningful principal reductions for borrowers who owe more than their homes are worth.   If Savvy Bob the Homeowner is considering default because he owes $80,000 more than the home is worth, do you think he might consider staying in his home if his principal balance was reduced by $60,000?  Throw-in a lower interest rate and I’m pretty sure you’d have a deal.  Considering the bottom line expenses for banks to foreclose, costs for carrying an REO, lost revenue, and a lower net sales price, principal reduction should start to look pretty good.

So I’m all for identifying those who are likely to choose to walk away, but before banks rush to hit them over the head with penalties, l hope they’ll put some thought into resolving the equity issues that are driving strategic default and offer borrowers a meaningful alternative.

Do you know a first time buyer?  Well, now might be the time for them to make their move.  On Monday, Fannie Mae announced the launch of a new incentive aimed at moving some of their REO inventory off the shelves.  For a limited time, buyers purchasing a Fannie Mae owned home, sold through their REO disposition operation known as HomePath may receive up to 3.5% of the purchase price in closing cost assistance.

Fannie Mae has successfully used similar incentives in the past, and hopes that this program will encourage buyers to step forward and purchase a home now.  The company acquired 262,078 homes through foreclosure in 2010, which is a considerable increase over the 145,617 homes they added in 2009. As of the close of the year their inventory was 162,489 single family homes with a carrying value of $15 Billion. Like I said, they have to move some inventory.

In order to qualify, buyers must be purchasing a home they will live in – the incentive is not offered for investor purchases.  The initial offer must be submitted no earlier than April 11, 2011, and must close escrow by June 30, 2011. Buyers may also have the opportunity to take advantage of Fannie Mae HomePath Financing and Homepath Renovation Financing which offer loans with as little as 3.00% down payment.

To a new buyer, this basically means that all their closing costs will be totally covered as those costs generally equal about 3.00% of the purchase price.  On a $300,000 home they would need just a $9,000 down payment in order to get into a home of their own.  Pretty sweet deal.  If you know someone who might be interested, please have them give me a call as I have access to all available qualifying homes in San Diego County.

Just in time for Christmas, Fannie Mae put new rules into effect on December 13th that will make it even more difficult for homeowners who have had a foreclosure to buy again.

Under the new lending guidelines that control qualification standards for Fannie Mae backed mortgages, a borrower who has had a foreclosure will now have to wait seven years before being approved for a new mortgage.  That is up from the current wait time of four years.  Another provision of the guideline revision tightens the acceptable debt-to-income ratio (DTI) to 45%, down from 55%, and includes stricter scrutiny of all installment debt.  Under the new guidelines, even one missed payment on a credit card could mean the difference between approval, and not qualifying.  Fannie Mae currently guarantees 28% of all residential loans.

While we all understand the need to move away from the “if you have a pulse, you qualify” standards of a few years ago, these new guidelines seem downright punitive!  On one hand the Fed is pumping money into banks urging them to make more loans to stimulate the economy, yet at the same time the new regulations make it more difficult for banks to lend.   And why the increase from four to seven years?  There is no rational reason for this extended wait time.  The only thing I can figure is that this is intended to scare homeowners considering strategic default into continuing to pay an inflated mortgage on a grossly devalued home.

Although there are several provisions of the new guidelines that may benefit some borrowers, overall this is not an effective way to get the housing market back on its feet.  Thanks Fannie:  You’ve just provided one more reason why I believe we’ll continue to see an increase in short sales over the coming year.