In an effort to prevent further foreclosure, mortgage finance companies Fannie Mae and Freddie Mac will now allow underwater homeowners who have kept up on their payments the chance to turn over their deed and walk away free and clear.
“There are lots of families who are trapped in their homes,” Julia Gordon, director of housing finance and policy at the Center for American Progress in Washington in a Bloomberg article. “They need a way to get out.”
Government-controlled Fannie and Freddie have already been helping some borrowers avoid foreclosure through short sales, allowing them to sell their homes for less than the mortgage balance and essentially forgiving the rest of the debt. Other previous programs allowed borrowers to refinance their loans into better terms, but only if they starting to default on their mortgages. This penalized those who were continuing to make their mortgage payments.
According to data from JPMorgan Chase & Co., there are currently 7 million homeowners with negative equity -owing more than their home is worth – which is an improvement from 2011 when there were 11 million underwater borrowers. Still, having such a large chunk of the homeowners stuck in their homes makes it difficult for the housing market to recover any faster. These Fannie and Fredde “mortgage releases” could give many people the opportunity to get out and move on with their financial lives.
The rules of the program are no cake walk, however. Borrowers must be paying 55 percent of their monthly gross income toward debt and they have to have a certifiable hardship, like an illness or getting a new job in a different city or state. If they have assets, homeowners may also be required to contribute up to 20 percent of their financial reserves toward the remaining mortgage balance.
While it will be a good opportunity for some struggling homeowners to avoid foreclosure, some worry that it will encourage people to give up.
“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 the Bloomberg piece. “We’re giving people an incentive to walk away, right when the housing market is starting to right itself.”
Fannie and Freddie have received roughly $190 billion in bailout money since the housing crisis 2008 and have only repaid about $50 billion so far. The two companies guarantee about half of all home loans in the nation, and have been taken over by the government, being deemed ‘too big to fail.’