Fannie Issues New Guidelines for Deeds in Lieu

New requirements were issued for deeds-in-lieu of foreclosure, which the Washington, D.C.-based firm now refers to as “mortgage release.”

Among three options for borrowers involved in a deed-in-lieu transaction is an immediate move, also known as a “standard mortgage release.” A second option is a three-month transition with no required rental payments, while the third option is a 12-month lease with a market-rent payment.

The changes were discussed in Servicing Guide Announcement SVC-2012-25. Fannie said that the new requirements are consistent with aligned policies described to the Washington, D.C.-based company and its secondary cousin Freddie Mac in a directive from the Federal Housing Finance Agency.

Except for borrowers who qualify for streamlined documentation, all borrowers being considered for a mortgage release must submit a complete borrower response package.

Streamlined borrowers must be 90 days late on their payments and have a credit score that is less than 620.

“The servicer may consider accepting a mortgage release from a borrower who is experiencing a financial hardship if other special relief measures or foreclosure prevention alternatives are not feasible,” the bulletin states. “To determine a borrower’s eligibility, the servicer must use the borrower’s delinquency status at the time of the evaluation.”

Servicers still need to adhere to the order of available liquidation options in the workout hierarchy. This means that borrowers should first be encouraged to utilize a standard or HAFA II short sale before being considered for a deed in lieu.

Unless a borrower or co-borrower has died or suffered a long-term or permanent illness or disability, eligible borrowers need to be at least 90 days delinquent. Another exception to the 90-day delinquency requirement is when the borrower was previously discharged from the debt obligation through a Chapter 7 bankruptcy and did not reaffirm the mortgage.

An eligible hardship needs to be documented. If the hardship type is not listed on e Uniform Borrower Assistance Form 710, then the borrower must provide a written explanation of the hardship on the Form 710.

If the loan is less than 31 days past due, then the property must be owner occupied — though vacant properties will require Fannie’s prior written approval. Borrowers in this category must have a debt-to-income ratio that exceeds 55 percent. Credit reports need to verify outstanding payments.

Otherwise, second homes and non-owner occupied properties are eligible.

Borrowers who obtained a new mortgage during the term of their financial hardship can only be considered if they transferred or started new employment that is at least 50 miles from the old location. Military borrowers who receive PCS order also fall into this category.

Borrowers involved on litigation other than foreclosure involving the subject property are ineligible for deeds in lieu.

Properties determined to be in need of repair will require Fannie’s written approval. Properties with environment hazards are ineligible without Fannie’s prior approval.

Active military borrowers with PCS orders who are 90 days’ delinquent on a loan secured by a property purchased on or before June 30 will not be required to make a cash contribution or sign a promissory note. Otherwise, the servicer must determine if the borrower is able to make a cash contribution based on program guidelines for borrowers with cash on hand of $10,000 or, if greater, six times the contractual monthly payment including escrows. Fannie will need to calculate contribution amounts when borrower cash reserves exceed $50,000. A maximum contribution of 20 percent of cash reserves is allowed.

Borrowers whose DTI ratio is less than 55 percent will be evaluated for a promissory note repayment based on a term of either five or ten years, though the payment can’t push the post-deed-in-lieu DTI past 55 percent.