Thursday, June 10, 2010

Redeeming the Time--Understanding Fannie Mae Guidelines and Right of Redemption Laws

As the summer homebuying season heats up, a lot of first time home buyers and investors are going to be looking to take advantage of lower housing prices and historically low interest rates. To get the most bang for their buck, many of them are going to look at foreclosed properties. And with a new crop of ARMS expiring in 2010, and a number of homeowners choosing the "strategic default" option as a means of dealing with the loss of their home's equity, there are going to be a lot of options to choose from in the foreclosure market.

That makes it especially important to really understand the new guidelines from Fannie Mae regarding loans for foreclosed properties. These guidelines were published in the May 27, 2010, Seller Guide updates regarding property title defects with regard to foreclosed properties with a redemption period.

Twenty-five states now have a redemption period for foreclosed properties during which an interested party can redeem a home sold at foreclosure. The interested party does not have to be the former home owner--it could be an investor with an interest in the property. For instance, suppose that Ted and Jane bought their home using a 75% first lien through ABC Bank and the seller carried a second lien of 20% to bring the total financing to 95% CLTV. Five years into the note, Ted and Jane are foreclosed on. Normally in the case of a foreclosure, the second lien holder is the loser, but where a right of redemption exists, the investor can redeem the foreclosed property within the set period of time.

A homeowner can also sell his right of redemption to a third party. Then that person can utilize the right of redemption to buy back the property.

Right of redemption laws exist to help homeowners get their properties back if they so desire, but in reality the person redeeming the property has to pay back any principal due, plus interest and all other lender costs associated with selling the property. Short of winning the lottery, for most homeowners who have gone into foreclosure, raising that kind of cash is an impossibility. And for more financially solvent borrowers who have simply chosen to walk away from their homes because they are underwater--a strategy called "strategic default"--it is counterproductive to destroy one's credit and then buy back the property.

However, laws granting right of redemption periods do give the homeowner that right, and starting May 27, Fannie Mae will not be financing these properties until the right of redemption has expired. According to the seller guide, "Unexpired redemption periods create an unacceptable title defect on the subject property, and do not conform to the existing policy that requires the property to have 'good and marketable' title. As such, Fannie Mae is clarifying the Selling Guide to state that properties with unexpired redemption periods have unacceptable title defects. Therefore, these mortgage loans are not eligible for delivery to Fannie Mae until after the expiration of the redemption period. The purchase of additional insurance, a redemption bond or similar coverage during the redemption period does not remedy the title defect and the mortgage loan remains ineligible for delivery to Fannie Mae."

When working with a foreclosed property, you now need to know the specific redemption laws of each state in which you work. Texas does not offer a redemption period--our state laws offer numerous homestead protections to the homeowner up front, and our state leaders apparently feel that the protections offered in the way of homestead rights are sufficient. New Mexico does provide a 30 day redemption period. California's redemption period is three months but if the property has not been sold for enough to cover the debt owed against the property the redemption period becomes one year, and Tennessee's is up to 2 years unless the redemption period has previously been waived.

That is one of the problems with redemption laws--they can vary widely based on state, and the amount of time alloted can be a moving target. Some states begin the redemption period from the time the foreclosure notice is filed; other states begin from the time that the foreclosure takes place. Still other states give the courts the right to review the foreclosure to make sure that the sale was fair.

Bear in mind that although this new change is a Fannie Mae Guideline, since both agencies are in conservatorship, Freddie usually follows suit with Fannie changes. And since the possibility of redemption does exist in those states that allow it, we could see similar guidelines being imposed on by all lenders. By preparing the eager borrower of the foreclosed property upfront, everyone in the process can save themselves a lot of stress.

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