On June 25, 2008 Fannie Mae, under announcement 08-16, published revised guide lines that updated underwriting requirements for borrowers with prior bankruptcy or foreclosure actions in their credit history, including deeds-in-lieu of foreclosure and pre-foreclosure sales (short sales). 

The revision in guidelines is extremely important as Fannie Mae is the largest purchaser and guarantor of mortgage loans in the secondary market. Fannie Mae and Freddie Mac account for more than half of all mortgage loans in the United States as they purchase loans from lenders. Most loan programs offered by lenders conform to Fannie Mae underwriting guidelines. 

The revised guidelines were produced to address the large increase in foreclosures in the United States and in particular set out Fannie Mae’s policy for purchasing a loan where the borrower had previously filed for bankruptcy or been party to a foreclosure action. 

Fannie Mae issued the following guidelines: 

• Bankruptcy – 4 years from either the dismissal or discharge date
• Bankruptcy (Chapter 13) – 2 years from the discharge date or 4 years from the dismissal date
• Bankruptcy (Multiple Filings) – 5 years from the most recent dismissal or discharge date for borrowers with more than one filing in the past 7 years
• Foreclosure – 5 years from the completion date. In addition, for the years 5 to 7 following the completion date the purchase of a principal residence is permitted with a minimum 10% down and 680 FICO score. The purchase of a second or investment property is not permitted for 7 years. Limited cash out refinances are permitted for all occupancy types. Cash out refinances are not permitted for any occupancy type.
• Deed-in-Lieu of Foreclosure – 4 year period from the date the deed-in-lieu is executed. In addition, for the years 3 to 7 following the execution date the borrower may purchase a property secured by a principal residence, second home or investment property with the greater of 10 percent minimum down payment or the minimum down payment required for the transaction. Limited cash out and cash out refinance transactions secured by a principal residence, second home or investment property are permitted pursuant to the eligibility requirements in effect at that time.
• Pre-foreclosure (Short Sale) – 2 years from the completion date (no exceptions or extenuating circumstances). 

 The guidelines clearly set out the advantage for the homeowner to short sale a property as opposed to allowing it to go into foreclosure as the waiting period is reduced to 2 years from 4 years for a deed in lieu or 5 years for a foreclosure. The waiting period for an investment property is seven years. 

Fannie Mae’s guidelines do not apply to portfolio mortgage loans or loans not involving a mortgage such as car loans or credit cards. Unfortunately, most loans are credit history driven and the borrower’s FICO score will be negatively impacted by any foreclosure or bankruptcy filing as 30, 60 and 90 day late payments are reflected on the borrower’s credit report.

About Ross Hair 

Ross Hair is the Real Estate Advocate and President of the Real Estate Investment Association

Fannie Mae has indicated that it intents to help renters stay in homes when the landlord goes into foreclosure. Instead of automatically evicting tenants, as it currently does, Fannie Mae appears willing to allow existing tenants to stay in the homes and pay rent to Fannie Mae as the new landlord. The stay of eviction only applies to homes owned or guaranteed by Fannie Mae.

Details of the new plan to help tenants are unclear but this is clearly not a blanket proposal to cover all properties owned or guaranteed by Fannie Mae. At a minimum the tenant must be able to meet the rent payments. 

The latest proposal follows Fannie Mae’s decision to halt all evictions for the holiday period through January 9, 2009. 

It’s a worthy sentiment but like most proposals it’s doomed to fail due to the administrative nightmare it will create for Fannie Mae. It’s almost impossible for Fannie Mae to identify and qualify tenants who will meet the program guidelines. It will also force Fannie Mae to enter the property management business – for which it has neither the expertise nor workforce. 

By holding rental properties on its balance sheet, Fannie Mae will be face even greater liquidity problems at a time when it has already been forced to go cap in hand to the Treasury for a substantial cash infusion. 

About Ross Hair 

Ross Hair is the Real Estate Advocate and President of the Real Estate Investment Association

Sustainable, Affordability Homeownership

Hope for Homeowners maintains FHA’s long-standing requirement that new loans be based on a family’s long-term ability to repay the mortgage. FHA only allows owner-occupants to be eligible for FHA-insured mortgages. Borrowers must also meet the following eligibility criteria:

• Their mortgage must have originated on or before January 1, 2008;
• Their mortgage debt-to-income must be at least 31 percent;
• They cannot afford their current loan;
• They did not intentionally miss mortgage payments; and
• They do not own second homes.

Features of FHA-insured loans under the new program include:

• 30-year, fixed rate mortgage;
• Maximum 90 percent loan-to-value ratio;
• No prepayment penalties;
• $550,440 maximum mortgage amount;
• Extinguishment of any subordinate liens; and
• New home appraisals from FHA-approved appraisers.

HUD, Treasury, FDIC and the Federal Reserve will form the Congressionally-mandated Board of Directors and work together to establish additional program standards.

Voluntary Lender Participation

FHA will continue to offer lenders an alternative to foreclosing on borrowers. Lenders will be encouraged to write-down the outstanding mortgage principal balances to 90 percent of the new value of the property. In many cases, reductions in principle will cost lenders less than the losses associated with foreclosure.

Funding

FHA will insure up to $300 billion in new loans. Borrowers will pay an upfront premium of 3 percent of the original mortgage amount and an annual premium of 1.5 percent of the outstanding mortgage amount. Any additional costs incurred by FHA will be reimbursed by Fannie Mae and Freddie Mac.

Program Timeline

The program will last from October 1, 2008 through September 30, 2011. Since September 2007.

About Ross Hair

Ross Hair is the Real Estate Advocate and President of Real Estate Investment Association.

The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does that mean?

Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.

Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts?

No, the Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.

What about refinanced homes?

Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.

Does this provision apply for the 2007 tax year only?

It applies to qualified debt forgiven in 2007, 2008 or 2009.

If the forgiven debt is excluded from income, do I have to report it on my tax return?

Yes. The amount of debt forgiven must be reported on Form 982 and the Form 982 must be attached to your tax return.

Do I have to complete the entire Form 982?

Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b.  Attach the Form 982 to your tax return.

Where can I get this form?

You can download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

How do I know or find out how much was forgiven?

Your lender should send a Form 1099-C, Cancellation of Debt, by January 31, 2008. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.  

Can I exclude debt forgiven on my second home, credit card or car loans?

Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?

Yes. The forgiven debt may qualify under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent.  A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?

There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982, page 4.