Fannie Mae Relaxes Rules for Once Troubled Borrowers (Investor Opportunity?)

So Government mortgage giant Fannie Mae has just announced some interesting new mortgage underwriting guidelines in an April 14th bulletin to lenders. And among them is a tasty little tidbit that changes things for a certain slice of troubled mortgage borrowers — a time-frame change the investment community would do well to have on our radar.

For those who have previously released their homes through short sale or a “deed in lieu of foreclosure”, there has always been a waiting period required before you could apply for another Fannie Mae backed loan.

In 2008, the waiting period was reduced from five years to four. But effective July 1, 2010, this waiting period has been reduced to only 2 years.

The “Catch”?

Now to qualify after that two year period, the new regs state that a minimum 20% down payment will be required — unless there are “extenuating circumstances” such as job loss, health problems, divorce, etc…

But I’m thinking, doesn’t pretty much any short sale by default involve “extenuating circumstances”? I mean, just show them the hardship letter you submitted with your short sale docs. Case closed. At least that’s what I think – only time will tell.

Why This Matters to Investors

So why does this matter, and how should we, as investors, USE this information?

Well for starters, if you couple this with the Obama administration’s new Short Sale assistance program (where mortgage servicing companies are paid $1,000 to handle successful short sales and mortgage holders get $1,500 for signing over their property), you’ve now got more compelling reasons than ever for distressed homeowners and lenders alike to pursue a short sale rather than just throwing up their hands and “letting things go”.

And from the investor’s perspective, this is information you can now use when negotiating with a distressed seller, to help enlighten them to the benefits of working with you to pursue a short sale versus foreclosure.

(In case you didn’t know, the typical “it’ll do less damage to your credit than a foreclosure” argument doesn’t really hold water anymore.)

The new 2 year rule could also come into play for you if you’re retailing houses. My bet is that most folks who “lose their house” through short sale or deed-in-lieu will have no clue they can qualify again in as few as 2 years. Anyone smell an opportunity there? What about for 2 year lease options?

So just keeping you in the loop, guys.

Oh and just so you know, Fannie’s rival Freddie Mac remains unchanged in their waiting period. But historically whatever one entity does successfully, the other tends to emulate shortly thereafter. So it’ll be surprising if they don’t follow suit.

If you want to read more about this, here are a couple of good articles from Housing Predictor and The Washington Post.

What are your thoughts on this? I’d love to hear them…

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JP Moses is a roughly-hewn man-child who first got into REI after reading Rich Dad, Poor Dad back in Y2K and went full time in 2002. He's tinkered in everything from landlording to short sales to rehabs to Realtoring to REOs to notes to owner financing, blah, blah, blah...Till he finally stuck his flag deep into wholesaling and has since flipped somewhere north of a couple hundred deals.

JP's not a “guru” but also doesn't think it's a bad word. Among his core values are authenticity, creativity, big honkin' value, general fun-ness and being unshaven. He's super proud to be chief blogger guy at and host of the free REIology podcast. He also thoroughly enjoys sharing his 53 best real estate investing forms with anyone who wants them. You should totally check that out. 🙂

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Barry Cunningham Reply

I read about this last week and we think this will be HUGE for real estate investors and we are including it in all of our recommendations. Good job talking this up!

tweklak Reply

I just wanted to bring this to your attention, so you can research it – attorney Jeff Watson ( ran a webinar last week regarding the short sale and HAFA rules,
Here are two basic reasons to avoid HAFA.
#1- The government HAFA program requires the homeowner to sign off on a deed-in-lieu in advance in case the short sale doesn’t work out, which is almost never disclosed.
#2- The HAFA program requires the seller to make payments at about 1/3 of their income during the short sale process which is also almost never disclosed. How many sellers do you know actually have that kind of money?
We spoke with several loss mitigators last week who had no idea that the HAFA required the deed-in-lieu and payments. They have no idea what they are pushing people into.

JP Moses Reply

Thanks for that – I hadn’t heard those points. I meant to catch Jeff’s webinar on that last week but wasn’t able to. I’ll look into this further and see if I can post more about it for everyone. Thanks!

Steve Reply

Hey JP,

Great job!
Its good to finally hear somebody put a spin on the negative instead of always complaining about the Obama admin… lol Though I thought I had heard the incentives had doubled…
This is a great strategy to add to the wholesaling lease options arsenal.

Kath Reply

Brilliant. The 2 year L/O strategy? Just Brilliant. Thank you.

bori1033 Reply

I think this is just another way of pursuading homeowners to better deal with their lender/bank/mortgage servicer in order to have them proceed with HAFA once they contact their lender. This so called ‘Relaxed Rule’ has been talked about since August of 2009. At least that’s when I first learned about it. How much this means to the investor? As far as retailing, this homeowners will rather buy in the area they lost their home to. But then again, in two years who knows what else may interest them. It’s going to be awhile before this homeowner rebound from this devasting blow. Let us not forget that this two year period doesn’t necessarily mean much unless their credit score regain traditional scoring points. Will two years be enough time to do that? I don’t think too many will be able. Not until the the economy and jobs regain some stability. This is just my opinion and I write about this on my blog.

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Edithrbear Reply

Thanks, this is great news and what a wonderful opportunity for the Smart Investor. E. Mckeller

real estate investing student Reply

Thanks. You make a good point. I’m new as a real estate investor and appreciate the insights.

Gabdoyle Reply

Is it a federal mandate that offers from investors have to wait 2 weeks after a foreclosure or short sale property goes on the market before they are responded? This is very frustrating to investors, we have seen many properties sold for less than my clients are willing to pay because owner occupants get first crack at it, we’ve even seen contracts fall apart because owner occupants have back out or not obtained financing but we’ve still been told to wait two weeks!

JP Moses Reply

HI, Gabdoyle – I don’t believe it’s a federal mandate…it’s just their rules…and it’s the rules we gotta play by. I know it kind of stinks for us sometimes. But the opportunity’s still very much there…trust me. Don’t fight the system. Find a way to work with it, work around it or avoid it altogether. Thanks for commenting!

Pdeleon9 Reply

sounds great, but are they any success stories?  We had a short sale 2.5 yrs ago. Trying to buy a house now, conventional loan 90/10.   Pre approved until now denied in the underwriting stage (2 wks before closing on a house we built).  Underwriting says our job loss and hardship letter is not enough “extuenuating circumstance”.  Who makes that decision and how can it be argued?  

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