by David Depman

How many underwater mortgages does it take to change the rules? The answer is north of 120,000. As of November 25th, that is the number of homes currently heading toward default that will be eligible for repurchase by the previous mortgage holders. The change in policy creates the opportunity for people to purchase their foreclosed homes for the property’s current market value, not the original value of the mortgage, as has been the case. The policy change, announced by Federal Housing Finance Agency director Melvin Watt is, in its simplest form, a principal reduction intended to keep families in their homes.

Earlier in his career as a state representative in North Carolina, Mr. Watt pushed for targeted principal reduction for homeowners drowning in mortgage debt. In parallel with this view, in 2013, a coalition of Attorneys General from Massachusetts, California, Delaware, Illinois, Maryland, Nevada, Oregon, and Washington wrote to President Obama, “FHFA’s refusal to consider principal write-downs as part of a comprehensive mortgage modification policy is inconsistent with its combined goal of asset preservation and foreclosure prevention”, and further, “It is far more profitable for any financial institution to hold a portfolio of performing $200,000 mortgages that keeps families in their homes than a portfolio of non-performing $250,000 mortgages headed toward default,” (letter)

The changes came before the announcement

Earlier this summer, the Washington Post highlighted the story of Jaime and Juana Coronel who repurchased their house after foreclosure prior to last Tuesdays announcement. The couple had been renting the house in a program designed to keep homeowners in their homes. In July of this year, more than sixty groups, including the ACLU, the NAACP and the National Consumer Law Center sent a letter to Watt asking him to ‘swiftly reverse the GSE policy on principal reduction’. Last Tuesday’s announcement confirms the move in this direction.

Now that this has happened, what will be the affect? These new mortgages would only be available to qualified borrowers in a primary residence that are 3 years removed from their foreclosure, and only if the properties are owned by Fannie  and Freddie. In a great number of cases this is the end of the story, as many of these former homeowners have moved on, or are not in a position to qualify.

For some, though, the 3 year rule for a federally backed mortgage may not be a stopper. Potential borrowers may find haven in alternative financing, such as loans through non-profits. Featured among these are many regional players like Boston Community Capital and CalHFA MAC.

The effects of this policy change are certainly in their infancy with many more announcements to follow. One thing is for certain, the LOs with access to the right tools have 121,000 more mortgages that may be suddenly in play. And with 1.6 million more mortgages in danger of foreclosure than average, principle reduction mortgages may be worth keeping an eye on in 2015.