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New Rules Determine Who Takes Control of Home Defaults

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In the past, a major problem in the mortgage market was that when consumers defaulted on their home loans backed by the two large government-sponsored enterprises, it wasn’t always clear who controlled that loan. Now, the government is trying to clarify the situation.

The Federal Housing Finance Agency, which oversees the mortgage-backing giants Fannie Mae and Freddie Mac, will soon have new rules in place to help clarify who – among the government-sponsored enterprises, lenders and servicers – is responsible for taking control of a mortgage when it goes bad, according to a new announcement. The new plans, called representation and warrant framework, will be put in place for all conventional loans sold or delivered beginning Jan. 1.

The goal of this new decision is to clarify exactly what exposure and liabilities lenders have on defaulted home loans, but does not affect those issued prior to the beginning of 2013, the report said. In general, lenders will now be responsible for doing quality control reviews of all mortgages prior to delivering them to Fannie or Freddie, rather than when the borrower falls behind on payments.

“Ultimately, better quality loan originations and underwriting, along with consistent quality control, help maintain liquidity in the mortgage market while protecting Fannie Mae and Freddie Mac from loans not underwritten to prescribed standards,” said Edward DeMarco, the acting director of FHFA. “These efforts contribute to a firm foundation for a new, sustainable housing finance system for the future.”

Under the new rules, lenders will not have to carry out certain obligations in repurchasing bad loans as long as they meet specific payment requirements, such as 36 months of consecutive, on-time payments, the report said. Further, home loans issued through the federal government’s Home Affordable Refinance Program will be eligible for relief after just one year of being acquired by Fannie or Freddie.

In the future, the government-sponsored enterprises will also make more tools to improve loan quality across the board available to lenders and servicers, the report said. Further, the FHFA will clarify some information about what home loans might be excluded from these new protections.

The housing market is still very much in recovery mode, but many government agencies are doing all they can to help make the entire real estate system run more smoothly.

Image: futureatlas.com, via Flickr

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