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Will Freddie Mac and Fannie Mae Help Slow the Foreclosure Crisis?

Posted on May 4, 2012 in Alternatives to Bankruptcy, Real Estate

 

Freddie Mac and Fannie Mae back over half of the nation’s mortgage loans.  Because they were exempted from the recent foreclosure settlement the Attorneys General reached with the biggest individual servicers (Chase, Bank of America, Wells Fargo, Citibank, and Ally/GMAC), many loans are still in crisis and these two semi-governmental bodies haven’t really addressed their role in helping our mortgage crisis.

A new loan set to go into effect on June 15th for Freddie or Fannie backed loans will require the giants to respond to short sale requests within 30 days, with weekly updates after.  With some short sales taking over 10 months to complete, this process hasn’t been effective as an alternative to foreclosure.  Impatient buyers will back out, leaving the parties without a way to walk away from the property without completion of the foreclosure process.  During this time, the borrower’s credit will suffer for each month the mortgage isn’t paid on time.

Short sales have their advantages if they are completed quickly.  The servicer can provide cash incentives for the borrowers to leave and they don’t need to wait out the required redemption period.  The borrowers can have the comfort of knowing they’ve done their best to eliminate any damages caused by their lack of payment.  And if this property is the borrower’s home, the forgiven debt won’t have to be taxed (at least until the end of this year).

Of course, any law that is meant to force a response from a slow, bureaucratic body is only as effective as its enforcement.  But given the rude and inefficient way in which many borrowers are treated when they try in good faith to conduct a short sale instead of heading into foreclosure or bankruptcy, it may be a welcome change and hopefully match buyers and sellers properly, and perhaps put a dent into the number of homes – and homeowners – in crisis.

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