Fannie Mae thinks the borrowers of this country are important – including the ones that do not always pay their bills on time. “In an effort to support overall market stability and reinforce the importance of borrowers working with their servicers when they have difficulty repaying their debt,” Fannie Mae has updated the “waiting period” regulations that used to require borrowers who defaulted on their loans to wait a period of years before borrowing through Fannie Mae again.

These updates specifically concern preforeclosure events. They do not deal, currently, with homes that go through the entire foreclosure process and are repossessed by the lender. According to Fannie Mae, a preforeclosure event can be a deed-in-lieu of foreclosure transaction, a preforeclosure sale or a short sale.

Prior to last Friday, April 16, when these updates went into effect, borrowers who had been involved in a preforeclosure event had to wait a specified amount of time – 4 years for deed-in-lieu, 2 years for a preforeclosure sale, and an undetermined amount of time for short sales – before they could get a new mortgage from the mortgage giant.

Now, however, waiting periods will be much more flexible. Instead of being determined by the type of preforeclosure event, the requisite waiting period, if there is one, will be determined by an evaluative process that factors in the loan-to-value (LTV) ratio for the preforeclosure transaction, the occupancy of the property, and the “extenuating circumstances” that led to the borrower’s inability to pay. Borrowers with an 80 percent maximum LTV ratio will have to wait 2 years to obtain a new mortgage, while those with 90 percent maximum LTV ratios will have to wait 4. If you have an LTV higher than 90, you could have to wait up to 7 years.

This may sound daunting, but there are a number of loopholes built in. Waiting period exceptions apply to borrowers with extenuating circumstances like loss of employment or if they can show that they have worked on reestablishing their credit. In fact, the highest LTV ratio waiting period can be cut down to 2 years if you can show adequate hardship, which is loosely defined.

On one hand, these policies could be a great way to get people back into houses and participating in the growth of the housing market much sooner. However, I fear that the loosely defined nature of “extenuating circumstances” leaves the door wide open for corrupt, predatory lenders and mortgage brokers to start putting people back into homes they cannot afford in just a few years. Think about last year’s loan modification fiascos, in which the “middle men” made hundreds of thousands on incentives for loan mods that they knew would never, could never, should never go through. This seems like a window for the same problem.

However, I’m excited about a new buying population being back on the market in potentially 2 years instead of 7 or more, particularly if they really did just have a really bad run of luck that they have been able to resolve to mortgage brokers’ satisfaction. I think this new program has a lot of potential for good and bad.

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