Struggling borrowers who relinquish their homes can live in them temporarily without having to make mortgage payments under new guidelines by mortgage giants Fannie Mae and Freddie Mac.

The guidelines, introduced late last year, are set to take full effect by March 1. They're meant to help those facing hardships such as a job loss, illness or the death of a spouse.

On March 1, Fannie Mae and Freddie Mac will roll out a new program allowing underwater homeowners to give up their homes and cancel their mortgages. The new rules for these so-called deed-in-lieu transactions apply to people who are current or less than 90 days late on their payments.

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About mortgage release

In a nutshell: Fannie Mae and Freddie Mac, the mortgage enterprises that back most of the home loans in the U.S., are streamlining the process for borrowers who can demonstrate hardships and want to give up their homes and be released from their debt. As part of the new guidelines, some homeowners can stay in their residences for up to three months without making mortgage payments or paying rent.

How to get started: Homeowners interested in the latest mortgage release guidelines should talk to their loan servicers, Fannie Mae and Freddie Mac representatives say.

Additional information: Here are some resources for homeowners:

•Fannie Mae has set up two help centers near Orange County: Call 866-442-8576 (Los Angeles area) or 866-442-9409 (Inland Empire)

•On the Web, see Fannie Mae'sknowyouroptions.com.

•For Freddie Mac, see the Avoiding Foreclosure Resource Center and Deed-in-Lieu pages onfreddiemac.com.

 

 

 

Bottom line: Homeowners can turn over the house keys and erase their debt – even if they are still current on their payments. In the past, borrowers typically had to be delinquent before they could qualify for such help as a loan modification.

"We don't view it as 'walking away,'" Fannie Mae spokesman Andrew Wilson said, referring to a term used in the housing industry to describe homeowners who bail on their mortgages. "We view it as taking ... responsible action."

Striking a deal to relinquish a home that's heading for repossession is nothing new; the homeowner gives the lender a "deed in lieu of foreclosure." Or some borrowers just stop making their mortgage payments, and the property is eventually foreclosed.

But now some homeowners can be released from their mortgages with the option of living in the homes payment-free for up to three months, Wilson said. The new guidelines also streamline the process: Banks can green light homeowners who qualify for mortgage release without having to seek case-by-case approval from Fannie Mae or Freddie Mac.

Fannie and Freddie, government-sponsored enterprises chartered by Congress, guarantee about 70 percent of mortgages in the United States. Both are in the process of winding down as policymakers look at revamping the mortgage market.

Wilson said the guidelines aim to avoid protracted foreclosures and get properties on the market more quickly. Homeowners must leave the residences in good condition. In return, a homeowner gets some time to make a transition and takes less of a credit hit. Another part of the program gives the borrower an option that has been available for a few years: Paying rent to stay in the home for up to a year.

If foreclosure can be prevented, Wilson said, "That's good for the borrower, it's good for Fannie Mae, it's good for the taxpayer and it's good for the neighborhood where that home is. We view it as saving money and reducing losses."

Under the guidelines, even someone with a vacation home could apply for a deed-in-lieu transaction on their primary residence. In some cases, homeowners may be asked to make a financial contribution.

California is a non-recourse state. That's means that after a foreclosure or short sale, the lender on a purchase-money mortgage has no right to the borrower's wages or assets. But a lawyer for Freddie Mac said the law does not prohibit contributions from borrowers who engage in deed-in-lieu transactions, according to Freddie Mac spokesman Brad German.

Reactions to the mortgage-release provisions are mixed.

Daren Blomquist of RealtyTrac, a nationwide foreclosure tracking service based in Irvine, said the guidelines may help individual homeowners but could camouflage the still shaky state of the housing industry.

"The bottom line is that these new requirements make it easier for homeowners with negative equity to walk away from their mortgages," Blomquist said. "This is an implicit acknowledgment that many of these homeowners will end up being foreclosed anyway and an attempt to short circuit the lengthy and messy foreclosure process – and possibly the negative press that comes with higher foreclosure numbers."

He said, "In many cases a mortgage release may be the best option for everyone involved, but the danger is that a shift away from completed foreclosures to mortgage releases could mask the fact that the housing market is still extremely fragile."

Blomquist said nearly 11 million homeowners nationwide are "seriously underwater."The number represents 26 percent of all homeowners with a mortgage, "and every mortgage release still represents a distressed homeowner who is losing his or her home."

In Orange County, 91,128 borrowers were underwater at the end of the fourth quarter in 2012, or 19.6 percent of homeowners with a mortgage, according to online home tracker Zillow.com. That fell from 21.3 percent in the third quarter.

Representatives for Fannie Mae and Freddie Mac said the agencies did not have projections on how many homeowners would qualify for mortgage release or how much money would be spent on it.

"The program will undoubtedly be a benefit for some borrowers facing hardship, but it is too soon to tell what impact this will have on the housing market and economy," said Dustin Hobbs of the California Mortgage Bankers Association. "Too many questions (are) left to be answered, including what effect this will have on borrower attitudes and behavior. As with all such programs, the devil is in the details, and we just don't know enough yet."

Jeff Lazerson of Mortgage Grader in Laguna Niguel questioned the timing of the new guidelines in light of the winding down of Fannie Mae and Freddie Mac, which were put into a conservatorship several years ago to help shore up the nation's crashing housing market. He said the Bipartisan Policy Center, a Washington, D.C., think tank, is about to release a blueprint for big changes.

"Why now, why after the eye of the storm has passed, are they inviting on-time paying borrowers who happen to be underwater to mail in their keys?" he said. "This probably has a lot more to do with reducing Fannie and Freddie's balance sheets of perceived toxic loans that are going to be hard to offload."

Contact the writer: 714-796-4903 or mkalfus@ocregister.com