Underwater homeowners have been outliers to the housing recovery thus far, but will a new deed-in-lieu program from Fannie Mae and Freddie Mac offer some relief?

By Peter Ricci

Everywhere you look nowadays, the housing market is showing improvement. Home prices are increasing, home sales and housing inventory are stabilizing and even homebuilding is beginning to pick up.

Yet, amidst all those signs of recovery, one sign of the housing downturn has persisted – the millions of homeowners who, despite being current on their mortgages, are nonetheless underwater, due to the price declines of 2007-2012. Fannie Mae and Freddie Mac, though, may have a solution for those homeowners; and it’s bound to be controversial.

Underwater Homeowners Allowed to Walk

Fannie and Freddie’s policy, as Business Week first explained, would essentially allow certain homeowners to, through a deed-in-lieu transaction, to relinquish their homes and cancel their debt. The rules are:

• The homeowners must be either current on their mortgages or less than 90 days late; second homes are not eligible for the program.
• They also must be making mortgage payments that are at least 55 percent of their monthly income, and be able to document the “hardship” that is inspiring the deed-in-lieu (such as a spouse’s death).
• The home must be clean and undamaged.
• Finally, the homeowners, depending on their financial situation, may have to offer up to 20 percent of their personal assets (excluding retirement accounts) to cover the leftover balance of the loan.

Fannie & Freddie to the Rescue?

So, is this the grand plan we’ve been waiting for to save underwater homeowners? Well, not exactly. Though certain homeowners, Business Week points out, will definitely benefit from the policy – those taking a new job or recovering from the death of a spouse/caregiver, along with military personnel – it still amounts to homeowners walking away from their properties, and without the financial upsides to homeownership.

And as Freddie spokesman Brad German explained, with how popular short sales have been as of late, homeowners may opt to short sell their property rather than going the deed-in-lieu route.

In the end, though, it all leads back to the great white whale of housing policy – a principal reduction program for the nation’s underwater homeowners, which is unlikely to come about as long as Ed DeMarco is acting director of the Federal Housing Finance Agency (FHFA). Though there were rumblings back in December that DeMarco would be fired, such action has not yet occurred, though housing advocates are still voicing their opposition to DeMarco’s handling of the FHFA.