Fannie & Freddie To Let Some Underwater Homeowners Walk Away From Their Mortgages

Since bailed-out mortgage servicers began dealing with the toxic loans made during the housing bubble, the focus has been on people who couldn’t pay their mortgages. Now Fannie Mae and Freddie Mac have an out for people who have continued to pay while their houses have lost value.

But is it all too little, too late?

Bloomberg reports that, starting in March, Fannie and Freddie (who own or guarantee a combined $5.2 trillion in mortgages) will offer relief to some homeowners who owe more than their house is worth but who have kept up their payments regardless. If these homeowners can show they need to relocate because of work, illness, or some other qualifying reason, they can apply for a deed-in-lieu transaction that will forgive the difference between the home’s value and what’s left on the mortgage, in exchange for handing the property over.

Under some circumstances, the homeowner may still need to pay some portion of the difference between the mortgage value and the home price. This could be either a cash contribution (of up to 20% of the homeowner’s financial reserves — not including retirement funds) or a promissory note for future no-interest repayments.

Those in favor of this announcement say that the previous foreclosure-prevention programs effectively penalized people who chose to keep paying their mortgages.

“Fannie and Freddie are finally recognizing that some people are stuck in their homes,” the director of housing finance and policy at the Center for American Progress tells Bloomberg. “There are a lot of families who need to move who can’t do it if they’re going to have debt hanging over their heads. There’s no winner when someone is forced to default on their mortgage — not the investor, not the homeowner, and certainly not the neighborhood.”

However, some say the timing of the announcement is bad, given that home prices are beginning to show signs of life and that Freddie and Fannie are still in the hole to the taxpayers who bailed them out to the tune of $190 billion.

“It’s an extraordinarily generous approach for companies still in debt to American taxpayers,” said Phillip Swagel, a professor at the University of Maryland’s School of Public Policy in College Park, Maryland. “We’re giving people an incentive to walk away, right when the housing market is starting to right itself.”