Freddie Mac and Fannie Mae have written a new escape clause into servicing regulations for homeowners who are both underwater and struggling to meet their mortgage payments. The new rule, which will go into effect on March 1, delegates authority to servicers to approve a deed-in-lieu of foreclosure for borrowers for whom neither a loan modification nor a short sale is a workable solution.
The program is available to all borrowers regardless of their delinquency status, but appears specifically targeted at those who, by virtue of being current or less than 90 days late on their mortgage, do not qualify for the existing deed-in-lieu option available under the Home Affordable Foreclosure Alternative (HAFA) program.
Freddie Mac also announced it has revised its foreclosure sale postponement requirements so that servicers no longer have to obtain written approval to postpone a foreclosure sale for mortgages that are more than 12 months delinquent. Servicers now have delegated authority to postpone any foreclosure sale if they have determined that doing so will protect Freddie Mac's interests.
Under the new rules a servicer can approve a deed-in-lieu if they have completed the evaluation required for all foreclosure alternatives. The servicer must offer the borrower a home retention option such as a loan modification or forbearance and must encourage a short sale prior to offering the deed-in-lieu alternative.
The borrower must be able to document an acceptable financial hardship, and convey a clear and marketable title to the property. A servicer is not permitted to approve a deed-in-lieu from a borrower who is less than 90 days delinquent unless the documented hardship is either the death of a borrower or death of the primary or secondary wage earner or long-term or permanent disability; serious illness of a borrower or co-borrower or dependent family member. Servicers can also approve a deed-in-lieu if the borrower was previously discharged from a Chapter 7 bankruptcy. If these qualifications are not met and the servicer still feels a deed-in-lieu is the best alternative they can submit a recommendation to the GSE for approval.
If the borrower is current or less than 31 days delinquent then at least one of the borrowers must occupy the mortgaged premises as a principal residence and must have a debt payment to income ratio greater than 55 percent.
The servicer is now required to conduct an interior property inspection no more than 48 hours before final execution of the deed to make sure the property is vacant, undamaged, and left in broom clean condition and all personal property is removed.
Servicers can offer up to $3,000 in relocation assistance to the borrower and may at its discretion offer additional assistance from its own funds. If the interior inspection reveals that the property is damaged, unclean, or personal property is left behind, the costs of cleaning or repair must be deducted from any relocation assistance.
If a mortgage is already in foreclosure prior to initiation of a deed-in-lieu, the servicer is required to continue with the foreclosure proceedings and must ensure there is sufficient time to complete the processing of the deed-in-lieu so that an executed deed can be received no later than 30 days before the scheduled foreclosure sale.
The incentive for servicers to complete a deed-in-lieu has been increased with this notice from $275 to $1,500.