Freddie Mac Foreclosure Workout Options
To qualify for a workout solution from Freddie Mac, homeowners must either be delinquent in their mortgage payments, or be facing the possiblity of becoming delinquent in the immediate future. The reduction in income or sudden increase in expenses must also be involuntary in nature, such as unemployment, undermployment, death of a wage earner, incarceration, a natural disaster, medical issue, or separation or divorce.
The only exceptions to the financial hardship requirement are for homeowners who own a manufactured home, or those establishing a payment plan with the servicing company for a period of less than twelve months. In these cases, the borrowers do not have to prove a hardship caused them to miss payments in order to qualify for relief options.
Freddie Mac’s workout solutions are divided into three broad categories — reinstatement, Relief Options, and Workout Options. There are a number of subdivisions contained in each of these categories, and any one may be used, depending on the circumstances of the borrowers.
When homeowners fall behind in their mortgage payments, servicers of Freddie Mac loans must pursue reinstatement options before any other solution. Reinstatement is where a borrower pays back all of the amounts they have missed. The end result is that the loan is once again current.
With a full reinstatement, the homeowners pay back all of the amounts that they have fallen behind, plus all of the interest and other costs the servicer has added on. This includes accelerated interest, advances for insurance and tax escrow accounts, legal costs, court fees, and any other allowed expenses. The servicing company does not have the right to refuse a full reinstatement, even if the payment does not include fees for appraisal, Broker’s Price Opnion, home inspection costs, or late charges.
A partial reinstatement allows the borrowers to pay back a portion of the total amount they are delinquent on and then begin a repayment plan for the balance. This is a solution often given to homeowners to avoid foreclosure, and the payment plan often lasts up to twelve months. If there was no escrow account on loan up to this point, the servicer must establish one.
Freddie Mac’s Relief Options allow homeowners to gradually get back on top of their mortgage by paying back the amounts they have fallen behind on. These solutions help borrowers avoid foreclosure, but are focused on paying back the arrears, not modifying the mortgage or allowing for the sale or transfer of the house.
As with a typical repayment plan, homeowners are able to pay their normal monthly mortgage payment, plus a portion of the amount they are delinquent on. Freddie Mac allows repayment plans of up to twelve months if they are not combined with any of the other options (such as either type of forbearance). The hardship requirement comes into play if the plan lasts longer than three months and the homeowners are behind more than ninety days in payments.
A short-term forbearance allows homeowners to suspend or reduce their payments for a period of time. At the end of this period, the missed portions or full payments must be paid in full or a repayment plan must be established. Payments can be suspended for up to three months; payments can be reduced for up to six months; and the repayment plan must last no longer than twelve months. In order to qualify for a short-term forbearance, homeowners must either have a sales contract on their house or meet the hardship requirements for Freddie Mac loans.
A long-term forbearance must be approved by Freddie Mac and is usually used only in extreme circumstances. Some of these may include a natural disaster, homeowners waiting for a medical claim, probate issues, or a lawsuit that may put Freddie Mac’s lien position at risk. Payments may be reduced or suspended for up to twelve months, after which the homeowners must pay the total amount delinquent, establish a repayment plan, or pay off the mortgage in full. The repayment plan must last no longer than twelve months.
Workout options are designed to help homeowners facing a more long-term change in financial situation avoid foreclosure. When a repayment plan or forbearance will not address a change in income or expenses, these solutions may make it more likely borrowers will either save their home or be able to sell or transfer it without going through foreclosure. All of these otpions must be approved by Freddie Mac and the mortgage insurer.
Freddie Mac allows loan modifications, although it will not consider lowering the principal balance of a mortgage. Modifications will be considered that reduce the borrowers’ interest rate, capitalize the amount delinquent, or change the type of mortgage (from adjustable to fixed rate, for instance). Homeowners must show a hardship and an ability to make reasonable payments in the future, as well as pay $300 for a processing fee. If homeowners default on a modification agreement, Freddie Mac will consider a short payoff.
Assumptions are allowed by Freddie Mac if the current homeowners are able to show a financial hardship. Servicers may charge between $400 and $900 for processing of an assumption, and the party assuming the loan must make a down payment. The down payment must be at least 5% of the total amount of the mortgage.
A short payoff is Freddie Mac’s term for a short sale, where borrowers are able to sell their property for less than the total amount they owe on the mortgage. Borrowers must list the house for its current market value and meet the hardship requirement. This may also be an option for homeowners who fall behind on a loan modificatioin.
Deed In Lieu
If the mortgage servicing companies determines that no other option would benefit the homeowners allow them to prevent foreclosure, a deed in lieu of foreclosure may be accepted. The property must also not be in a state of serious depredation or disrepair — if it is, the deed in lieu may not be accepted. This option would allow borrowers to transfer their home back to Freddie Mac, in return for not pursuing foreclosure.
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