Sam Gendusa February 11, 2013

Mortgage providers and servicers, Fannie Mae and Freddie Mac, are finally taking steps to correct one of the least logical consequences of the financial collapse and subsequent bailout: That homeowners who diligently continued to make mortgage payments despite becoming underwater received no help, while homeowners who simply stopped paying received special treatment.

Bloomberg reports that after the peak in 2006, the real estate market lost a third of its value, and there were 11 million homeowners still underwater in 2011. Those that tightened their belts and continued to make payments throughout the process were given no recourse to recoup the money they lost when the bubble burst. However, if people in the same position stopped making their mortgage payments altogether, the provider would consider a short sale to get what they could from the situation.

According to the Bloomberg piece:

Non-delinquent borrowers with illness, job changes or other reasons they need to move will become eligible in March to apply for a so-called deed-in-lieu transaction that erases the shortfall between a property’s value and the size of its mortgage. It follows a change in November that lets on-time borrowers sell properties for less than they owe, known as short sales, wiping out the remaining mortgage debt. Normally, the lenders could pursue people to recoup their losses.

So, essentially, beginning in March, homeowners with some kind of qualifying event, be it an illness or a new job, etc., will be able to apply for a “deed-in-lieu transaction” that acts like a short sale. In other words, now even those who have been making payments, but still need to get out from under the weight of their mortgage, will have some recourse to follow.

Unfortunately for these homeowners, their credit will suffer as a result of this deed-in-lieu transaction. The hit to their score will be nearly as bad as a foreclosure, so while this may be a good option for some, it is not an ideal solution by any means.

But it is something, says Julia Gordon, director of Housing Finance and Policy at the Center for American Progress:

Fannie and Freddie are finally recognizing that some people are stuck in their homes,” she said. “There are a lot of families who need to move who can’t do it if they’re going to have debt hanging over their heads. There’s no winner when someone is forced to default on their mortgage -- not the investor, not the homeowner, and certainly not the neighborhood.

We will have to wait and see how this plays for those affected by an underwater mortgage.

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