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Fannie, Freddie to let some underwater homeowners walk away

A "detour" sign is posted at the main entrance to the Freddie Mac headquarters in McLean, Va.

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.

About the author

David Lazarus is an American business and consumer columnist for the Los Angeles Times.
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It's terrific that we're starting to see recovery in the housing market, but we still have millions and millions of people underwater. http://www.brightskylending.com/payday-loans-online-direct-lenders-only.... 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 services.

It's terrific that we're starting to see recovery in the housing market, but we still have millions and millions of people underwater. http://www.brightskylending.com/payday-loans-online-direct-lenders-only.... 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 services.

I went through a Deed In Lieu in 2011 after moving cross-country to CA for my job and finding it impossible to sell or rent my house. It was, frankly, a pain and I spent over $6K in legal fees as well as paying $5K to the bank plus agreeing to a 20K repayment plan. So at the end of the day, the bank got back all their loss, while I have a scar on my credit report. Luckily the overall impact to my credit was not horrible (I'm down about 60-80 points from my peak), but supposedly this is not as bad as a foreclosure where you just walk away. However, had this program existed at the time, I think I could have saved myself a lot of time and money - the overall process probably wouldn't have needed a lawyer and the bank probably would have had a clue as to what to do. It took a while before the bank even figured out what a Deed in Lieu was.

I heard mentioned either at the end of this story or the beginning of the next that this is a moral question. I often wonder why for a homeowner it is moral and for a business owner it is not.

I did a short sale on a home in 2009. I paid a mortgage on an empty home for a year before I decided to do the short-sale at least partially because I had for so long been told how important it was to pay your mortgage. The value of my home was a little more than 1/3 of the purchase price at the time and I lived and worked 70 miles away.

Any business would have walked from a business as a 'cost of doing business'.

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