A sputtering housing market has left the Federal Housing Finance Agency (FHFA) in a tricky position. The Obama administration wants FHFA to take steps to stimulate the housing market, but FHFA must also guard against loose practices like those that led to the previous housing crisis. Thus, FHFA policies must balance on this fiscal policy tightrope.
FHFA recently announced one such policy to try to increase the demand for foreclosed homes and clear the current backlog of over 120,000 properties held by FHFA through Fannie Mae and Freddie Mac. If you lost your home to foreclosure to Fannie Mae and Freddie Mac, you may now be able to repurchase your old home at the current market value, as opposed to paying off the total unpaid balance on your original mortgage.
The logic is that if you can pay the same market price as the average homebuyer, you are more likely than the average homebuyer to purchase your old house – if you can now afford it at current market price.
Previously, homeowners were prohibited from buying back their foreclosed homes at market value. The reason was to prevent severely distressed and underwater homeowners from intentionally defaulting and repurchasing the home at a lower value – effectively wiping out a significant portion of their outstanding principal.
Limitations and qualifications of the buyback rule are listed below.
- Fannie/Freddie Specific – Eligibility is limited to foreclosed properties held by Fannie and Freddie on or prior to November 25th, 2014.
- Primary Residence – The buyback rule only applies to foreclosed primary residences. You can only buy back a foreclosed home that was your primary residence, and you must use it as your primary residence if you repurchase it under this program.
Second homes or homes held for investment purposes on either end of the transaction (foreclosure or repurchase) are not eligible.
- Three-Year Waiting Period – You must still follow Fannie’s and Freddie’s rule that requires foreclosed-on borrowers to wait three years after the foreclosure to qualify for a new mortgage.
The waiting period is another line of defense against intentional default and repurchase, reasonably assuming that someone who is foreclosed on needs time to get his or her fiscal house in order.
- Mortgage Qualifications – Since you are acquiring a new mortgage, you will now have to meet new mortgage qualifications just like every new homebuyer.
Credit is likely much tighter than it was when you received your original mortgage, and you may have difficulty qualifying now with the combination of tight credit and a foreclosure in the not-too-distant past.
If you were foreclosed on recently and/or do not qualify for a traditional mortgage, you will have to come up with cash or some form of alternative financing to buy back your home – which, if you have just been foreclosed on, is highly unlikely.
The rule may not have much effect on the housing market because many will not qualify, others have moved on and secured alternate housing, and some people just may not want their old house back.
FHFA is open for criticism either way. If the rule fails, it will be considered insufficient homeowner relief. If the program succeeds, FHFA has rewarded those who borrowed irresponsibly. It’s easy to criticize, but let’s give FHFA credit for trying.
In summary – if you do want your old house back, can qualify for a loan, and have passed the three-year period, you now have the means to reclaim your old home. Ultimately, you may decide to pass… but at least you have the opportunity.
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