(March 2018) On February 14, 2018, Fannie Mae and Freddie Mac announced updates to their servicing guides to reflect policy changes for first lien mortgage loan charge-offs and lien releases. This policy change, which generally aligns the policies of the Enterprises, was directed by the Federal Housing Finance Agency (FHFA), in an effort to provide servicers with more clarity around charge-offs and to bring the practices of the Enterprises closer together.
Mortgage charge-offs typically occur when the servicer deems the debt uncollectible and opts to write the debt off on their books. They most often occur in distressed, low-value neighborhoods, where the costs to maintain and market the property while navigating the foreclosure process exceed the debt and/or the market value of the collateral. After a charge-off, the servicer does not complete a foreclosure, leaving the property in limbo and potentially harming the neighborhood and the municipality.
Prior to this policy, the Enterprises had very different approaches to charge-offs, with Fannie Mae doing very few and Freddie Mac doing quite a large number. Neither had very clear guidelines for services. FHFA embarked on this work with an eye toward preventing neighborhood blight as a result of charge-offs. NCST participated in conversations with FHFA to help identify those circumstances under which charge-offs are truly necessary as opposed to instances when the creditor simply does not want to complete a foreclosure due to the economics of the property.
The new policy either requires or permits servicers to recommend a charge-off to the investor only when the debt secured by the property is deemed uncollectible and/or certain other limited circumstances apply. These conditions include:
- When there has been an approved short-sale or other negotiated settlement
- If there is a very low principal balance (below $10,000 for Fannie Mae; below $5,000 for Freddie Mac)
- If the property has been impacted by a disaster such that rebuilding is impracticable
- In certain cases, when the property poses a threat to health and safety (and, therefore, a liability risk to the investor)
- When a third-party is willing to take responsibility for the property.
We are hopeful this policy change will lead to more thoughtful and responsible decision-making about the disposition of vacant and abandoned GSE properties, resulting in better outcomes for neighborhoods.
If your neighborhood or organization has been impacted by mortgage charge-offs and lien releases, or if you would like to discuss this or any other policy issues, please contact Julia Gordon.
This column was originally published in March 2018.