At least 10 million homeowners aren't feeling the love of the housing market's recovery -- that is, they still have underwater mortgages where they owe more than their homes are worth. But some borrowers were thrown a life raft this week. Mortgage heavyweights Fannie Mae and Freddie Mac have announced a bailout program for struggling homeowners who are current on their payments. If there's a pressing need to leave their property, they can just walk away. To explain how it will work, we turned to Julia Gordon, director of Housing Finance and Policy at the Center for American Progress.
What are the origins of this program?
"There are many people who, for one reason or another, want to leave their home. They have a job in another state. They've been through a divorce. Perhaps someone has died or become ill. In those cases, it's very important for those people to leave the house without having to default on their loan if they don't need to," says Gordon.
Why is the program starting now with the housing market on the comeback trail?
"It's terrific that we're starting to see recovery in the housing market, but we still have millions and millions of people underwater. The best thing -- not just for homeowner and investors, but for neighborhoods -- is for people to be able to leave their house when they can no longer stay in it," says Gordon.
Learn more. Read a blog from Julia Gordon: "No, The Government Isn’t Launching A New Bailout Program For Underwater Homeowners"
Gordon says the program is "really just a different kind of short sale, in a way, not a brand new flavor of bailout." Here's a short picture of things. First, a few definitions, and then an explanation of what's new:
Loan modification: A person can’t afford current mortgage payments (reduction in income, death, divorce, disability), but would like to stay in house and keep paying mortgage with reduced payments.
Short sale: A person either needs to move for a job or can’t afford/maintain the home and wants to leave the home, but is underwater and wants the lender to agree to forgive any amount leftover if the sale doesn’t cover the mortgage.
Mortgage release (deed in lieu): Either the person wants to leave the home, but does not want to/cannot physically handle selling the home, or the person would otherwise want to stay in the home, but cannot afford the payments even under a modification, so may want to turn in keys and leave or stay as a renter.
What’s new: Previously, in order to do a short sale or mortgage release, lenders would usually require that the person be behind on their mortgage payments, which would mean they’ve already taken a hit on the credit score. Under new short sale/mortgage release programs, under certain circumstances, a person can get permission to leave without having to go delinquent on their mortgage. Other things that are new is that Fannie/Freddie requirements are now aligned with each other (less confusing for everyone) and servicers have more discretion to offer these solutions to borrowers without having to get permission from Fannie/Freddie on a case-by-case basis.
What impact will this have on taxpayers?
"This program will allow taxpayers to take less of a hit. The worst outcome -- both for taxpayers and homeowners -- is always a foreclosure. The only people who get rich on foreclosures are lawyers and sometimes mortgage servicers," says Gordon. "We have a housing crisis and millions of people are underwater on their mortgages. The fact is, life goes on. So we say to ourselves, 'What's the second best thing we can do,' since we can't roll the clock back to before that happened."
What happens to your credit score if you qualify for the program and walk away from your home?
"It's not good for your credit score. It's better than a foreclosure and it's better than stopping paying on your mortgage just to get out of the home," says Gordon.