Fannie Mae announced new guidelines for short sales and the deed-in-lieu of foreclosure process last month as part of the Servicing Alignment Initiative, a set of mortgage loan servicing and delinquency management requirements for loans owned by Fannie Mae and Freddie Mac. One of the first changes is that Fannie Mae is now calling a “deed-in-lieu of foreclosure” a “Mortgage Release.”
For borrowers who can no longer afford their home, the guidelines encourage servicers to have them pursue a short sale first before they consider one of the Mortgage Release options. Lenders prefer short sales over doing a Mortgage Release because with a short sale they don’t have to take over the property. They are better for borrowers as well since a Mortgage Release is worse for their credit than a short sale.
In the announcement, Fannie Mae clarifies several short sale requirements originally outlined in the short sale guidelines issued in August. The update says servicers are required to make sure the deed has been sent for “recordation in the name of the buyer within 48 hours of the closing.” It also states that a borrower can only receive a cash incentive for a short sale if the home was an occupied principal residence at the time of the evaluation notice.
These updates to the short sale requirements are effective immediately.
The announcement also outlines three Mortgage Release options. A Mortgage Release is like a “voluntary foreclosure,” since you are handing the home back to the bank, but without having to go through the entire foreclosure process. The negative impact on your credit is exactly the same as a foreclosure.
The new guidelines now offer three options for borrowers completing a Mortgage Release: the first is an immediate move or standard Mortgage Release, where you are released from your mortgage and must vacate the house; the second is a three-month transition with no rent payment required; and the third is a twelve-month lease with making market rent payments.
The two Mortgage Release transition options, what used to be referred to as “deed for lease” or “D4L,” allow borrowers to stay in the home in order to prepare to transition out of the house. The first transition option allows a borrower to remain in the home for three months without paying rent but must agree to allow the house to go up for sale on the 30th day of the lease. The second transition option allows the borrower to stay in the home with a 12 month lease and pay the monthly current market rate for rent—not the amount of the original mortgage payment.
Loan servicers are required to implement these new policies for all mortgages evaluated for a Mortgage Release on or after March 1, 2013 and are encouraged to implement them sooner if possible.