Mortgage-finance giants Fannie Mae and Freddie
Mac will allow homeowners who have been foreclosed upon to repurchase
their homes at market value even if they owe more, reversing a policy that
prohibited such transactions. The change comes as Melvin Watt, the director of
Fannie and Freddie’s regulator, has come under increasing pressure from some
groups to use the companies to provide more relief to struggling homeowners.
Previously, someone who lost a home through foreclosure and
wanted to buy it back from Fannie or Freddie needed to pay the full amount owed
on the mortgage, even if the market value of the home was less. That was
intended to take away the motivation for homeowners to intentionally default in
order to get the balance of their mortgages reduced.
In effect, that meant Fannie and Freddie had two standards
where they would be willing to sell properties they owned to a new buyer at
market prices when they wouldn’t do so for the former homeowner.
The old policy drew the ire of some politicians and
nonprofit groups, which argued that it encouraged homes to stay vacant and hurt
neighboring property values. In June, Massachusetts Attorney General Martha
Coakley sued Fannie and Freddie, alleging that the policy violated a
Massachusetts state law that allowed market-value sales to foreclosed-upon
homeowners in some circumstances. That lawsuit was dismissed in October.
However, the impact of the change could be limited. It will
only apply to the 121,000 homes that Fannie and Freddie have already foreclosed
on and own, a provision that’s intended to curtail any incentive for borrowers
in good standing to default. That narrow scope is unlikely to quiet the
drumbeat for the FHFA to make bigger changes intended to help a larger number
of borrowers who owe more than their homes are worth.
Foreclosed-upon borrowers will also still need to find the
cash or financing to buy the old home back at market value, a tall order for
those with tarnished credit histories. Since Mr. Watt took office in January,
many politicians and nonprofit groups have asked that he allow Fannie and
Freddie to reduce the principal of mortgages for borrowers who owe more than
their homes are worth, a step that he has so far avoided taking.
The new policy in effect reduces mortgage principal, albeit
for a small number of foreclosed-upon borrowers. Some nonprofit groups said
that Fannie and Freddie would be better served to reduce the borrower’s
principal before a foreclosure.
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