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Anna Baluch
Banking Expert
Anna Baluch is a freelance contributor to Newsweek’s personal finance team with a focus on personal loans, student loans, credit cards, and more. She has spent years writing for small businesses as well as large publications on various financial topics. Baluch lives in Cleveland, OH with her husband and two young daughters.
Federal regulators announced the approval of rules intended to provide quality control and eliminate potential discriminatory practices in the use of automated valuation models in appraisals.
The rules were originally proposed a year ago by a group of federal agencies involved in their design, including the Office of the Comptroller of the Currency, Federal Housing Finance Agency, Federal Reserve, Federal Deposit Insurance Corp., Consumer Financial Protection Bureau and the National Credit Union Administration.
The regulations will require mortgage originators and secondary market issuers to have procedures in place to ensure confidence in AVM estimates, protect against data manipulation and provide a backstop against conflicts of interest. They also mandate ongoing random sample testing and compliance with nondiscrimination laws.
The final rule does not spell out specific requirements for how institutions are to structure their practices but allows each to determine their own procedures based on their size and risk profile.
“The flexible approach to implementing the quality-control standards provided by the final rule will allow the implementation of the standards to evolve along with changes in AVM technology and minimize compliance costs,” the announcement said.
Finalization of the proposed regulations comes after a comment period, with the agencies receiving approximately 50 responses from stakeholders.
The addition of nondiscriminatory policy surrounding AVM use — what the regulators referred to as the rule’s “fifth factor ” — received support from many commenters but also detractors.
“While existing nondiscrimination law applies to an institution’s use of AVMs, the agencies proposed to include a fifth quality control factor relating to nondiscrimination to heighten awareness among lenders of the applicability of nondiscrimination laws to AVMs,” the federal announcement said.
Supporters said nondiscrimination could be seen “as a dimension of model performance and a required aspect of quality control,” adding that failing to address bias might result in ” safety and soundness risk.”
But public remarks also pointed to pushback involving such a mandate, with some comments suggesting documented instances of AVM bias were not prevalent. Others mentioned the fifth factor duplicated existing laws and other policies, while at the same time, provided no clear performance metric for users to determine if bias existed within data.
Some opposed pointed to the cost of compliance and limited resources at their institutions.
“They argued that small entities do not have access to an AVM’s data or methodology, are unable to validate the algorithms that AVM providers use, and lack the staff to assess the AVM models results,” according to the announcement.
Commenters also said the burden of nondiscrimination compliance should fall on the AVM providers, who often hold proprietary models. The regulators noted a number of individuals calling for the creation of a separate independent third-party nonprofit to test AVM systems to ensure compliance. Such an entity would both save lenders time and improve data quality, they said.
In addition to mortgage originations, the policy applies to AVM use in the determination of values for loan modification requests and applications for home equity lines of credit. But the regulation exempts licensed appraisers utilizing AVMs in the process of their work.
Use of automated models gained momentum as the government-sponsored enterprises began seeking alternative appraisal methods to address speed and costs. But their adoption previously drew criticism from the likes of CFPB, who raised concerns about potential algorithmic biases involved with any tools influencing credit decision making.
The Department of Veterans Affairs has extended a moratorium on foreclosures for vets with GI Bill home loans. The move gives mortgage companies more time to get a new program up and running to rescue veterans who were facing foreclosure through no fault of their own.
“We’re calling on mortgage servicers to follow a targeted foreclosure moratorium so we can make sure that Veterans get the support they need to stay in their homes,” Under Secretary for Benefits Josh Jacobs said in a statement.
The VA initially asked mortgage companies last year to halt all foreclosures after an NPR investigation revealed that the VA had abruptly ended a key part of a pandemic mortgage relief program, stranding tens of thousands of vets who were still in the middle of it with no affordable way to get current on their home loans. The end-date on that foreclosure moratorium was May 31st. Mortgage companies will now have until the end of 2024 to implement the VA’s new rescue plan — the Veterans Affairs Servicing Purchase (VASP) program. It’s welcome news to veterans stuck in limbo.
“It relieved the pressure off of me that I know I’m not gonna wake up one morning and see a sign outside and see a sheriff at the front door telling me to get the hell out,” said Vietnam-era Marine Corps veteran Edward O’Conner.
“But at the same time, I hope that it gives the VA enough time for them to get their head and ass wired together,” O’Conner said in exasperation. “You gotta understand it gets me frustrated.”
Paused payments
After O’Connor’s wife lost her job during the pandemic, the VA told him he could pause mortgage payments on his VA-backed home-loan through what’s called a forbearance. Many vets were told they could simply add the missed payments to the back of their loan after their financial hardship was over. But VA ended that part of the program while thousands of vets were still in forbearance and failed to set up an affordable alternative to let them resume paying.
Suddenly vets like O’Connor got calls demanding all the missed payments at once. He said he’s now more than $61,000 behind and sees VASP as his only way to keep his home. The new six-month moratorium is comforting, but O’Connor says neither his mortgage company nor his contact at the VA can explain to him when VASP will be up and running and whether he will qualify for the help.
“So I’m kind of in the dark right now and it’s kind of making me a little bit leery. But the only thing I have faith in is the VA. … It’s just that I’m still racking up month after month after month of payments that I’m behind and I’m afraid,” he said.
Many other veterans are worried. “A six-month window, like that’s great, but six months is not a lot of time,” said Iraq vet Josiah Mena.
Mena is also watching his debt pile up, with the threat of imminent foreclosure if the VA moratorium ends. He’s been offered alternatives that would involve paying all his arrears at once which he can’t afford; at this point he said that’s $71,000. Or his mortgage company keeps offering him a loan modification at a much higher interest rate that he said would add $1,300 to his monthly payment. Both Mena and O’Conner said they couldn’t afford those much higher-cost options their lenders have been trying to enroll them in. Mena said the only way he’ll be able to keep his family of five in their Long Island home is VASP, which he said representatives for his mortgage company tell him they still don’t have up and running yet.
“And then when I asked them are they gonna in the future? They said we’re not sure. ” he said.
Mena said he calls his mortgage company once a week and he’s also in touch with a VA loan adviser. He said the VA rep has been more knowledgeable and encouraging.
“So he just told me to just keep on trucking, and keep on checking in on them,” Mena said.
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Delinquent and distressed CMBS loans increase in May | Mortgage Professional Specialty Commercial Commercial, multifamily originations stall as owners hold off on major moves The increase in the overall distress rate was largely attributed to CMBS loans totaling $2.2 billion becoming distressed. Over two thirds of that, or $1.5 billion, stemmed from imminent or actual … [Read more…]
WASHINGTON, D.C. (January 22, 2024)– The Mortgage Bankers Association’s (MBA) monthly Loan Monitoring Survey revealed that the total number of loans now in forbearance decreased by 3 basis points from 0.26% of servicers’ portfolio volume in the prior month to 0.23% as of December 31, 2023. According to MBA’s estimate, 115,000 homeowners are in forbearance plans. Mortgage servicers have provided forbearance to approximately 8.1 million borrowers since March 2020.
In December 2023, the share of Fannie Mae and Freddie Mac loans in forbearance declined 1 basis point to 0.15%. Ginnie Mae loans in forbearance decreased 8 basis points to 0.39%, and the forbearance share for portfolio loans and private-label securities (PLS) decreased 3 basis points to 0.27%.
“Forbearance as a loss mitigation option is diminishing,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “While forbearance is a powerful tool for delinquency surges resulting from natural disasters or major disruptions such as a pandemic, today’s borrowers are not experiencing widespread financial distress. The overall performance of servicing portfolios – particularly government loans – declined in December. Factors such as seasonality, a changing labor market, resumption of student loan payments, and the rise in balances on other forms of consumer debt are likely at play.”
Walsh also noted that MBA anticipates that the unemployment rate, a leading indicator of mortgage performance, is expected to increase gradually to 4.5 percent by the end of 2024 from 3.7 percent at year-end 2023.
Key Findings of MBA’s Loan Monitoring Survey – December 1 to December 31, 2023
Total loans in forbearance decreased by 3 basis points in December 2023 relative to November 2023: from 0.26% to 0.23%.
By investor type, the share of Ginnie Mae loans in forbearance decreased relative to the prior month: from 0.47% to 0.39%.
The share of Fannie Mae and Freddie Mac loans in forbearance decreased relative to the prior month: from 0.16% to 0.15%.
The share of other loans (e.g., portfolio and PLS loans) in forbearance decreased relative to the prior month: from 0.30% to 0.27%.
Loans in forbearance as a share of servicing portfolio volume (#) as of December 31, 2023:
By reason, 61.2% of borrowers are in forbearance for reasons such as a temporary hardship caused by job loss, death, divorce, or disability; while 26.8% of borrowers are in forbearance because of COVID-19. Another 12.0% are in forbearance because of a natural disaster.
By stage, 51.7% of total loans in forbearance are in the initial forbearance plan stage, while 31.5% are in a forbearance extension. The remaining 16.8% are forbearance re-entries, including re-entries with extensions.
Of the cumulative forbearance exits for the period from July 1, 2020, through December 31, 2023, at the time of forbearance exit:
29.4% resulted in a loan deferral/partial claim.
17.7% represented borrowers who continued to make their monthly payments during their forbearance period.
18.5% represented borrowers who did not make all of their monthly payments and exited forbearance without a loss mitigation plan in place yet.
16.0% resulted in a loan modification or trial loan modification.
10.7% resulted in reinstatements, in which past-due amounts are paid back when exiting forbearance.
6.5% resulted in loans paid off through either a refinance or by selling the home.
The remaining 1.2% resulted in repayment plans, short sales, deed-in-lieus or other reasons.
Total loans serviced that were current (not delinquent or in foreclosure) as a percent of servicing portfolio volume (#) decreased to 95.44% (on a non-seasonally adjusted basis) in December 2023 from 95.71% in November 2023.
The five states with the highest share of loans that were current as a percent of servicing portfolio: Washington, Colorado, Idaho, Oregon, and Montana.
The five states with the lowest share of loans that were current as a percent of servicing portfolio: Louisiana, Mississippi, Indiana, New York, and Illinois.
Total completed loan workouts from 2020 and onward (repayment plans, loan deferrals/partial claims, loan modifications) that were current as a percent of total completed workouts were 74.39% in December 2023, which was 21 basis points below the percentage of total loans serviced that were current for the month.
MBA’s monthly Loan Monitoring Survey (replaced MBA’s Weekly Forbearance and Call Volume Survey in December 2021) covers the period from December 1 through December 31, 2023, and represents 64% of the first-mortgage servicing market (31.9 million loans). To subscribe to the full report, go to www.mba.org/loanmonitoring.
NOTES: For more detailed information on performance metrics, including seasonally adjusted delinquency rates by stage (30 days, 60 days, 90+ days), please refer to MBA’s Quarterly National Delinquency Survey at www.mba.org/nds. Fourth-quarter 2023 results will be released on Thursday, February 8, 2024.
The next publication of the Monthly Loan Monitoring Survey (LMS) will be released on Tuesday, February 20, 2024, at 4:00 p.m. ET.
Inside: Uncover the realities of financial aid repayment for students. Learn about FAFSA, loan forgiveness, credit impacts, and strategies for managing your student debt. Find out which types of debt you must pay back.
Financial aid is a beacon of hope for many aspiring students, granting them the financial support they need to access higher education.
Yet, understanding the basics of FAFSA makes applying for financial aid confusing for most students. When considering aid options, it’s crucial to differentiate between the various available types.
Navigating your repayment obligations can seem daunting, but with proactive management, they needn’t be overwhelming.
Take stock of your financial aid package and parse out which portions require repayment.
Understanding these details is the first step towards fulfilling your obligations without compromising your financial well-being.
Remember to read the fine print and don’t hesitate to reach out to your loan servicer for clarification. They are there to help guide you through the repayment process.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
Do you have to pay back FAFSA money?
Technically, FAFSA indicates how much financial aid you can qualify for. Whether you need to repay depends on the type of financial aid you received:
Grants and scholarships: These forms of aid do not require repayment.
Work-Study: These funds are earned through part-time work and do not require repayment.
Loans (subsidized, unsubsidized, and Direct Plus Loans): These must be repaid with interest.
It’s important to note that while grants typically don’t have to be paid back, certain circumstances, such as withdrawal from a program or changes in enrollment status, may require you to repay federal grant money.
Start filling out your FASFA properly with these tips.
Do you have to pay scholarships back?
When it comes to scholarships, the name of the game is financial support without the strings of repayment. Generally, scholarships are like gifts—they do not have to be paid back. Perfect for the undergraduate!
Scholarships are awarded for various reasons such as academic excellence, artistic or athletic talent, or involvement in community service, among others. That said, it’s imperative to understand the terms set by the scholarship provider.
Most scholarships are commitment-free, but some may carry conditions such as maintaining a certain GPA, completing a degree in a specified field, or requiring the recipient to follow through with certain obligations. If these conditions are not met, there could be repercussions, including the requirement to repay the funds.
Learn how to pay for college without loans.
Types of Financial Aid That Require Repayment
I’m not going to lie when I was looking at borrowing for financial aid for college I was confused with the names and types of aid offered. Now, I know the best course of action is to get paid to go to school.
Thankfully, there is more information readily available for this type of information rather than relying on your guidance counselor.
So, here is the info you need.
Unraveling Federal Student Loan Repayment
First, you must understand the different types of Federal Student loans to know their repayment requirements.
Each loan type has its own set of rules and repayment schedule, typically beginning after you graduate, leave school, or drop below half-time enrollment.
Federal loans boast flexible repayment options.1
The Standard Repayment Plan for federal loans entails a fixed monthly payment amount, ensuring that the loans are fully repaid within a standard period of 10 years, and extends to 30 years for direct consolidation loans. This plan is often the quickest way to pay off loans, providing a consistent monthly payment over the repayment term.
The Graduated Repayment Plan starts with lower monthly payments that increase every two years, designed to pay off all student loans within 10 years, or 30 years if it’s a direct consolidation loan.
The Extended Repayment Plan offers borrowers with over $30,000 in federal student loans the flexibility of fixed or graduated payments over a 25-year period.
If affordability is a concern, you might settle on an income-driven repayment (IDR) plan, which keys your monthly payments to your earnings and family size. Should your finances take a downward turn, relief is available through programs like deferment or forbearance, allowing you to temporarily suspend payments.
After 20 to 25 years on an IDR plan, you might even be eligible for loan forgiveness for any remaining balance. This doesn’t nullify your entire debt but can relieve a significant financial burden. Teacher Loan Forgiveness and Public Service Loan Forgiveness (PSLF) are two such avenues, provided eligibility requirements are met.
Deciphering Private Student Loan Responsibility
These private loans are offered by non-government entities such as banks, credit unions, and online lenders, and repayment rules can be more stringent. As such, it is best to start with traditional federal loans.
While you typically aren’t required to repay private student loans while you’re in school, interest accrues during this time, increasing your eventual debt. After leaving school, some lenders allow a grace period similar to federal loans, but this isn’t guaranteed. Check with your lender for specifics on repayment commencement and grace periods.
Repayment plans with private loans are usually less flexible and often lack income-driven options. Monthly payments are fixed, and lender offerings on deferment and forbearance can be less generous, with some providing no options for such measures.
This is why it is best to learn how to pay for college without parents’ help.
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When You Need to Start Paying Back Financial Aid
Federal Loans: Grace Periods and Repayment Plans
Federal student loans, notably, offer a six-month grace period following graduation, leaving school, or dropping below half-time enrollment status. During this period, no payments are due, offering you time to get financially settled and choose a repayment plan.
Repayment plans span the Standard, where you’ll pay a fixed amount each month for a term of usually ten years, to Graduated, where payments start lower and increase over time. Income-Driven Repayment Plans adapt to your income level, ensuring that your student loan payments are manageable relative to your earnings.
Each plan has unique advantages depending on your financial situation and long-term goals. The key is to select one that corresponds with your ability to pay, aligns with your career trajectory, and manages your debt effectively over time.
Always be proactive in contacting your loan servicer to discuss plan options or changes in your financial status.
Private Loans: Lender-Specific Timelines and Terms
Private loans come with lender-specific timelines and terms that can vary widely from one lender to another. Unlike federal loans, private loans don’t come with a standardized grace period, although some lenders may offer a similar post-graduation moratorium on payments.
Borrowers must check their loan agreements to determine when repayment should begin.
The terms of repayment for private loans are also set by the lender and typically don’t offer the same flexibility found in federal programs. Fixed and variable interest rates are based on credit scores, and while some lenders might offer loan modification options in cases of financial hardship, such policies are not universal.
Remember, with private loans, leniency for late or missed payments is not a given.
Consequences of Defaulting on Financial Aid
The Effects on Credit Scores and Future Borrowing
Missing payments, or worse, defaulting on your student loans, are red flags to future creditors that appear on credit reports and can significantly lower your credit score. A lower score can make securing further credit from lenders—whether it’s for a mortgage, a car loan, or a credit card—an uphill battle.
Moreover, the repercussions ripple outward: Not only might you face higher interest rates due to perceived risk, but landlords and employers can reference credit scores during their tenant or employment screening processes.
Maintaining on-time payments is an investment not only in your education but also in your broader financial stability and opportunities.
Legal Repercussions and Wage Garnishment Risks
Wading into the murky waters of default on student loans can unleash legal repercussions that ripple through your financial landscape. The government has tough mechanisms to recoup defaulted federal student loans, ranging from wage garnishment — where a portion of your paycheck is allocated to your debt without your consent — to seizing tax refunds and other federal benefits you may be entitled to receive.
The prospect of wage garnishment adds a level of complication to an already tense situation. In such cases, the government can legally claim up to 15% of your disposable income. This can strain your finances even more, potentially forcing you to make hard choices about your monthly budget.
These same consequences do not typically apply to private student loans, which are subject to state laws. However, private lenders can bring lawsuits against borrowers in default, leading to potential wage garnishment or asset liquidation as decided by a court.
The message is stern yet simple: Stay vigilant with student loan repayments to forestall these severe outcomes.
Options for Managing Repayment Challenges
Loan Forgiveness, Cancellation, and Discharge Opportunities
Navigating the sea of student loan debt isn’t without its lifelines. Loan forgiveness, cancellation, and discharge programs can serve as financial floatation devices, providing necessary relief in an ocean of repayment.
Loan forgiveness is typically occupation-specific. For instance, Public Service Loan Forgiveness (PSLF) absolves remaining federal loan debt after 120 qualifying payments for professionals in government or non-profit sectors.
Cancellation might occur under circumstances like your school closing prematurely or if you’ve been defrauded by the institution.2
Additionally, if you become totally and permanently disabled, you may qualify for a discharge, relieving you from the obligation to repay your federal student loans.
Exploring these opportunities requires patience and diligence, as each comes with strict eligibility criteria. Nonetheless, they can significantly lighten the burden of student debt.
Strategies for Keeping Student Loan Payments Affordable
Crafting a strategy to keep student loan payments within the realm of affordability hinges on exploring all available options and making informed choices. Consider the following ways to ensure your loans remain manageable:
Income-Driven Repayment Plans: Federal loans offer several plans that base your monthly payment on your income, notably capping payments at a fixed percentage of your discretionary income. These plans can significantly decrease your monthly obligations if you’re starting with a lower salary.
Refinancing or Consolidation: You might find a lower interest rate through refinancing, which can reduce your monthly payments and the total cost over the life of the loan. Consolidating multiple federal loans can streamline payment processes, though it may average out to a higher overall interest rate. This is what I did.
Applying for Deferment or Forbearance: In times of financial hardship, job loss, or returning to school, you can apply for a temporary suspension of payments. While interest may still accrue, it can provide short-term relief.
Making Extra Payments: By paying more than the minimum or making bi-weekly payments, you can reduce the principal balance faster and save on interest in the long run.
Setting a Budget and Cutting Expenses: Sometimes, the most effective strategy is tightening your budget. By trimming unnecessary expenses, you may free up funds for your loan payments.
Every borrower’s situation is unique, so consider your financial circumstances and long-term goals when choosing the best strategy for you. Always maintain open communication with your loan servicer to stay abreast of changes or additional assistance programs that may become available.
Should I refinance my Student Loans?
Refinancing your student loans can be a strategic move to manage debt, potentially offering lower interest rates and different repayment terms to suit your financial situation. It involves replacing your current loan with a new one, typically through a private lender, and may provide relief if you’re struggling with high payments.
However, borrowers should carefully consider the loss of federal loan benefits, like loan forgiveness, before proceeding with refinancing their student loans.
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Making Informed Financial Aid Decisions – How to Review and Understand Your Aid Offer
When the much-anticipated financial aid offer lands in your hands, taking the time to thoroughly review and understand it ensures you’re making an informed decision. Here’s how you can break down your aid package:
Identify Free Money: Distinguish between grants and scholarships that don’t require repayment from loans that do. These are the parts of your offer that you’ll want to maximize.
Assess Work-Study Opportunities: If your offer includes federal work-study, understand that these funds must be earned and are not guaranteed. They depend on your finding an eligible job and fulfilling work hours.
Analyze Loan Details: Look closely at the type of loans offered, their interest rates, and repayment terms. Remember, federal loans generally offer more favorable terms than private loans.
Calculate Net Cost: Subtract the total aid package, excluding work-study, from the overall cost of attendance to determine what you’ll need to cover through savings, income, or additional loans.
Consider Cost of Living: Ensure that you take into account living expenses and indirect costs like books and supplies when reviewing your aid offer.
If anything is unclear, don’t hesitate to contact the school’s financial aid office for clarification. The goal is to fully understand your commitments before accepting any part of the aid offer.
Remember Not All Financial Aid Offers Must Be Accepted
Not every portion of the financial aid offered to a student needs to be accepted.
It’s crucial to carefully evaluate the components of the financial aid package, as some elements, such as loans, will need to be repaid with interest. Ultimately, it’s important to make informed decisions about which types of aid to accept based on one’s financial circumstances and long-term educational costs.
Frequently Asked Questions (FAQ)
FAFSA, the Free Application for Federal Student Aid, is a form that determines your eligibility for different types of financial aid, not money in itself.
Some aid offered via FAFSA does not need to be repaid, like grants and scholarships, while other types, such as federal student loans, do require repayment with interest.
If you withdraw from college, your student loans remain in place and need repayment.
Following withdrawal, usually a six-month grace period for federal loans before repayments start. However, interest may accrue during this time, except for subsidized federal loans, which don’t accumulate interest until after the grace period.
Yes, FAFSA loan debt, which generally refers to federal student loans obtained through the FAFSA application process, can be forgiven, canceled, or discharged under certain conditions, such as public service work, teaching in low-income areas, or permanent disability.
However, these options have specific eligibility requirements. So, be careful and read the fine print.
If you don’t pay back financial aid that is in the form of a loan, you risk defaulting, which can lead to wage garnishment, withheld tax refunds, lowered credit score, and other financial consequences.
It can make future borrowing more difficult and become a legal issue. Always seek help before defaulting.
What Happens If You Don’t Pay Back the Financial Aid?
If you don’t pay back financial aid that is in the form of a loan, you risk defaulting, which can lead to wage garnishment, withheld tax refunds, lowered credit score, and other financial consequences.
It can make future borrowing more difficult and become a legal issue. Always seek help before defaulting.
Source
Federal Student Aid. “Federal Student Loan Repayment Plans.” https://studentaid.gov/manage-loans/repayment/plans. April 28, 2024.
Student Loan Borrower Assistance. “Borrower Defense to Repayment.” https://studentloanborrowerassistance.org/for-borrowers/dealing-with-student-loan-debt/loan-cancellation-forgiveness-bankruptcy/cancellation-forgiveness-options/borrower-defense-to-repayment/. April 28, 2024.
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MA non-judicial mortgage foreclosure can take about 120 days, or four months, to complete. Judicial foreclosures vary depending on your state. In California, this process can take two to three years.
A nonjudicial mortgage foreclosure can take about 120 days, or four months, to complete. Judicial foreclosures vary depending on your state. In California, this process can take two to three years.
If you’ve fallen behind on your mortgage payments, the threat of foreclosure can become overwhelming. If you wonder “How long does foreclosure take?” know that you still have options.
Understanding what you can do if your house is in foreclosure can help you mitigate the damage done to your credit and overall financial health. Depending on your situation, you might even discover how to save your home from foreclosure.
What Is Foreclosure?
Foreclosure means that your mortgage lender can legally repossess your house due to nonpayment. They can then sell your house to help repay the debt you owe on it. And this is true whether you are behind on your first or second mortgage. Home mortgage rates will define when lenders can begin the foreclosure process—this is typically determined by how behind on your payments you are.
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Remember that every state has different rules and regulations for foreclosure procedures, and many states offer exceptions that may work in your favor. If you think you may be in danger of foreclosure, work with a legal professional to determine your state’s guidelines.
For example, in some states, you have to miss a certain number of payments before foreclosure processes can begin. Some states may also allow you to reinstate the loan up until a specific deadline.
What Happens When a House Goes Into Foreclosure?
State and federal laws, your mortgage agreement, and the mortgage holder’s personal decisions are major factors. Generally, the foreclosure process starts three to six months after you miss your first mortgage payment, assuming you don’t catch up on payments.
State laws vary, so work with a legal adviser or your lender to determine what will happen in your specific situation. In general, mortgage foreclosure involves the following steps:
The mortgage holder gives the defaulting homeowner a written notice of default. This is a formal notice that you have fallen behind on your payments and are in default.
The homeowner receives a limited amount of time to correct the default and pay all amounts due. That can include interest, penalties, attorney charges, and any other fees allowed by your state’s laws and your mortgage contract.
Once the time allowed for the homeowner to correct the default has passed, the mortgage holder will give notice of a foreclosure sale. This is the actual day of foreclosure.
Many states have a redemption period after the foreclosure sale, allowing you to reclaim your home.
Foreclosure actions can wipe out some of the property owner’s debt, such as the original mortgage, home equity loans, and second mortgages. However, you still have to pay any remaining costs associated with your second mortgage.
You might also be responsible for some of the mortgage payments even after losing your home. If the property sells for less than the balance owed on the original loan, a lender could file a deficiency judgment against you in court.
A deficiency judgment requires that you repay the difference and it lets the mortgage holder collect your assets to compensate for the debt. Not all states allow deficiency judgments in all circumstances. Work with a lawyer or legal adviser to determine your rights and plan of action.
Lenders’ Obligations in a Mortgage Foreclosure
Lenders have different obligations in different states. However, when it comes to mortgage foreclosures, they all typically have at least three common requirements:
Notice of default. In most states, lenders are required to provide a homeowner with sufficient notice of default. The lender must also provide notice of the property owner’s right to cure the default before the lender can initiate a foreclosure proceeding.
Written proof of money owed under the mortgage. Lenders are usually required to file statements that itemize the amount the property owner owes under the mortgage.
The amount owed includes the principal, interest, late charges, attorney fees, and any other charges the lender is permitted to charge under the terms of the mortgage or the laws of the state.
Service member relief. Lenders are also required to certify in writing that the property owner is not a member of the armed services before initiating a foreclosure action.
The Servicemembers Civil Relief Act is intended in part to protect deployed active-duty service people. If you are a member of the armed services, consult an attorney about your rights as they concern foreclosure proceedings.
Ways to Stop or Prevent a Foreclosure
The best way to stop a foreclosure is to take action to prevent the lender from beginning the process. When possible, try these proactive ways to save your home from foreclosure:
Catch up on your default. In many cases, the first notice of default provides you with options for catching up on what you owe. If you can make up your payments and stay current, the lender is much less likely to foreclose.
Ask for a loan modification. Many lenders will work with you if you need help making your loan payments. Home affordability programs can help you catch up on late payments or potentially reduce the amount you pay if you’re experiencing financial hardship.
Request a short sale. If you can’t afford your home anymore, you can request a short sale. The lender has to agree to a short sale, but if they do, you can sell the house to a third party for less than you currently owe.
In some states, the difference is forgiven, while in others, you may be required to pay the difference between the sale price and the remaining loan amount. A short sale will affect your credit, but the effect will be less than that of a foreclosure or bankruptcy.
File for bankruptcy. Filing a bankruptcy petition that includes your mortgage puts an automatic stay in place. This means that lenders can’t continue any type of collection procedure until the bankruptcy has been resolved or dismissed.
Whether or not you keep your home depends on what type of bankruptcy you file and whether you can work out mortgage payments in the future. Filing for bankruptcy can have severe consequences for your credit and finances. Consult with an attorney before moving forward with this option.
Defenses Against Foreclosure
If the lender has already filed for foreclosure and none of the options above will work for you, you might be able to legally fight the filing with a technical or substantive defense. Only you and your attorney can determine how to proceed through the process.
One example of a technical defense is when a property owner is not given adequate notice of the default and proceedings. However, technical defenses are often not very helpful in preventing foreclosures because a mortgage holder can easily correct the defense by correcting the procedural defect.
Substantive defenses use the terms of the mortgage itself to halt a foreclosure. Here are some examples of substantive defenses to the foreclosure process:
You aren’t in default, and the debt and interest have been paid on time according to the terms of the mortgage.
The mortgage holder committed fraud in obtaining the mortgage.
If you believe you may have a legal reason to stop the foreclosure, you need to file an objection to the sale with the court. In most states, you can file objections before the foreclosure sale takes place, after the sale takes place, or before the court ratifies the sale if the sale was improperly conducted.
When a debt is forgiven in a foreclosure action, taxpayers are considered to have made money. That means that the taxpayer or property owner may owe taxes on the difference between the value of the home and what is owed on the mortgage and forgiven in the foreclosure action. You will want to work with your tax professional to help determine your tax responsibility in this situation.
Consider this example to understand how it might work:
You owe $120,000 on the home. The bank sells your home for $100,000.
The bank accepts the $100,000 it got in the sale and forgives the rest of the debt via foreclosure, which means it doesn’t seek to collect that money from you.
The IRS considers that $20,000 as a form of income because it’s money you should have had to pay but didn’t. You might owe taxes on that $20,000.
Help Your Credit With Credit.com
Short sales and other foreclosure proceedings can hurt your credit by a substantial amount. Foreclosure can appear on your credit report for seven years. In many cases, you will be required to wait two to eight years before you can purchase another home.No matter what happens with a foreclosure, it’s a good idea to find out where your credit stands and how you can work to improve it. Credit.com provides a Free Credit Report Card that offers a look at your credit history and a better understanding of how you’re doing with the five factors that impact your score.
Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.
Key takeaways
Fannie Mae and Freddie Mac are government-sponsored enterprises that aim to provide the mortgage market with stability and affordability.
They are major players in the secondary mortgage market, buying loans from lenders and either keeping them or repackaging them as mortgage-backed securities.
Fannie Mae and Freddie Mac were both created by Congress but have different intended purposes and loan-sourcing methods.
As you explore your mortgage options, you’re likely to come across two names: Fannie Mae and Freddie Mac. Although you won’t directly get a home loan through these government-sponsored enterprises (GSEs) — private entities operating under a Congressional charter — they nonetheless have an impact on your getting a mortgage and its terms. Let’s take a closer look at these key players in the mortgage industry, and what distinguishes them.
What are Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are government-sponsored enterprises. Congress created both with the goal of adding stability and affordability to the country’s mortgage market. They also provide banks and mortgage companies with ready access to funds on reasonable terms, adding liquidity to the mortgage market.
Both agencies are major players in the secondary mortgage market. That is, their focus is buying loans from mortgage lenders, giving those institutions more capital to continue offering financing to other borrowers. Fannie Mae and Freddie Mac then either keep them or, more often, repackage them as mortgage-backed securities that can be sold to investors.
By acting as a market-maker — that is, constant buyer — they ensure liquidity in the lending world. As of 2023, Fannie Mae and Freddie Mac support around 70 percent of the mortgage market, according to the National Association of Realtors. That means the majority of conventional loans, those offered by private lenders, end up being backed or purchased by one of the two entities.
Though they set criteria for loans, neither Fannie Mae nor Freddie Mac originate or directly provide mortgages to homebuyers. Instead, you’ll get your loan from a mortgage lender, such as a bank, credit union or online lender, which can then choose to sell the loan to one of these GSEs, assuming the loan’s eligible.
Differences between Fannie Mae and Freddie Mac
While they may seem incredibly similar, Fannie Mae and Freddie Mac have some key differences. Here’s a closer look at what differentiates Freddie Mac from Fannie Mae.
Intended purpose
Fannie Mae was established with the intended purpose of creating a more reliable source of accessible funding for banks and mortgage companies. This, in turn, opened the door to more widely accessible and affordable mortgages for Americans seeking to become homeowners. Congress created Freddie Mac, on the other hand, with the goal of expanding the secondary mortgage market, buying loans that meet its standards from lenders. This function allows lenders to make more loans available to prospective buyers.
Loan sourcing
Although both do buy mortgages, each GSE purchases loans from different sources. In general, Fannie Mae tends to buy loans from larger commercial banks and mortgage lenders, whereas Freddie Mac often buys loans from smaller banks.
Lending requirements
Fannie Mae and Freddie Mac also have slightly different requirements for the mortgages they purchase. In both cases, Fannie and Freddie loans must be conforming loans, or adhere to these standards, for them to be eligible for purchase. The requirements cover the amount of the home purchase price that can be financed, the borrower’s credit score and debt-to-income (DTI) ratio, loan-to-value (LTV) ratio and other factors.
Loan programs
Fannie and Freddie each sponsor different loan programs — mortgage products that expand homeownership opportunities to buyers who may not be able to afford a conventional down payment. These include HFA loans offered through state housing finance agencies, as well as the HomeReady and HomePossible mortgage programs, offered through approved private lenders. Both empower buyers by requiring only a 3 percent down payment.
Similarities between Fannie Mae and Freddie Mac
Now that we’ve covered their differences, let’s touch on how Fannie Mae and Freddie Mac are similar.
Their creation and structure
Both Fannie Mae and Freddie Mac were created by Congress to address issues in the housing market. They exist as publicly-traded corporations that are under the conservatorship of the government.
Buy and sell mortgages
Fannie Mae and Freddie Mac buy loans from lenders and repackage them into mortgage-backed securities. This benefits the mortgage market in a couple of ways. First, it lowers the risk of default for lenders since they don’t have to keep these loans on their books. Plus, selling mortgage-backed securities to investors creates stability in the secondary mortgage market, further lowering risk and leading to lower interest for borrowers.
Increase loan availability
Because Fannie and Freddie buy loans from lenders, this increases the amount of money lenders can loan out. Once they close a loan and sell it to Fannie or Freddie, lenders can re-lend that cash.
Standardize loans
Fannie Mae and Freddie Mac only buy loans that conform to the FHFA’s standards. That means they must be under a certain loan limit and borrowers must meet specific financial requirements. Lenders have adopted these standards for most conventional conforming loans so they can sell their mortgages to Fannie and Freddie.
Fannie Mae and Freddie Mac history
In 1938, the government created Fannie Mae, or the Federal National Mortgage Association, amid the struggles of the Great Depression. The goal of Fannie Mae was to create a more reliable source of funding for banks, opening doors for more Americans to become homeowners, figuratively and literally.
Freddie Mac, short for the Federal Home Loan Mortgage Corporation, came on the scene through an act of Congress in 1970, with a similar purpose of ensuring that there are reliable, affordable mortgage funds available nationwide.
Since 2008, both Fannie Mae and Freddie Mac have operated under the conservatorship of the Federal Housing Finance Agency (FHFA). Though both are currently under a conservatorship of the same agency, the two entities are separate from one another, each with its own shareholders and leadership.
Fannie and Freddie in the 21st century
Both Fannie and Freddie played a role in the Great Recession. In the years leading up to the housing market collapse, they backed or owned numerous subprime mortgages. When the housing bubble burst, economic pressures and large losses led to the need for the government to step in and help them with bailouts. The two agencies took on more debt but, as a result of their losses, they risked becoming insolvent, and were put under FHFA conservatorship. They’ve since paid back most of the bailout money.
During the COVID-19 pandemic, Fannie Mae and Freddie Mac offered mortgage relief and protections to homeowners, including forbearance, loan modification programs and a moratorium on foreclosures and evictions.
Who regulates Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are regulated by two government agencies: the FHFA and the U.S. Department of Housing and Urban Development (HUD). Along with HUD and FHFA oversight, the President of the United States appoints five of the 18 board members at each entity. Further details of the regulation for Fannie Mae and Freddie Mac are laid out in two government acts: The Federal Nation Mortgage Association Charter Act and the Federal Home Loan Mortgage Corporation Corporation Act.
What this means for you
Since you can’t take out a mortgage directly from Fannie Mae or Freddie Mac, why should you care about these big names in the mortgage market? In addition to keeping the mortgage market humming and making homeownership more accessible overall, here’s how they can affect you:
They create more affordable financing options, including lower-down payment loan programs.
They foster competition among lenders, leading to lower rates.
They help set borrowing standards, influencing the qualifications you need to meet to obtain a mortgage.
To find out if you have a Fannie Mae- or Freddie Mac-backed loan:
The interest rate freeze proposal has just been unveiled by the Bush Administration, a plan which could help as many as 1.2 million borrowers stay in their homes.
“There is no perfect solution,” President Bush said Thursday as he announced the agreement reached among a slew of mortgage industry players. “The homeowners deserve our help. The steps I’ve outlined today are a sensible response to a serious challenge.”
Bush was quick to explain that the plan wasn’t a bailout, claiming the proposed interest rate freeze would only benefit responsible homeowners.
“We should not bail out lenders, real estate speculators or those made the reckless decision to buy a home they knew they could never afford,” Bush said after meeting with industry leaders at the White House. “But there are some responsible homeowners who could avoid foreclosure with some assistance.”
He also noted that thousands of borrowers have been sent letters about their options, and that aid would only come to those who asked for it, urging at-risk homeowners to call the new telephone hotline at 1-888-995-HOPE.
The president had originally given out the wrong phone number for the hotline, which was later corrected by White House staff.
Bush also played a bit of the blame game, saying the Democratic-controlled Congress “has not sent me a single bill to help homeowners.”
Hillary Clinton called Bush’s plan “too little, too late”, referring to the fact that it would exclude the 400,000 homeowners whose mortgage rates have or will reset in the final three months of 2007.
Fed Chief Ben Bernanke released a statement saying, “The streamlined process for refinancing and modifying sub-prime adjustable rate mortgages announced today is a welcome step in helping Americans protect their homes and communities from the consequences of unnecessary foreclosures.”
Meanwhile, the S&P said the mortgage freeze plan may lead to more downgrades on mortgage bonds because loan modifications will lead to reduced payments to investors.
Shares of the top U.S. mortgage lender, Countrywide Financial (CFC), rose $1.68, or 16.12%, to $12.10 on the news.
That said, here are the details regarding the “interest rate freeze proposal” unveiled today:
In order to qualify for an interest-rate freeze, you must have received your mortgage sometime between January 1, 2005 and July 31, 2007, and you need to be facing an interest rate reset sometime between January 1, 2008 and July 31, 2010.
If you fall within this range, you may be eligible to have your interest rate frozen for five years, though you won’t qualify if you are able to make payments at the higher adjustable rate, or if you can’t make payments at the original teaser rate.
The plan is focused on first-lien, 2/28 and 3/27 ARMs for borrowers who are no more than 30 days behind on their mortgage payment.
It only applies to owner-occupied properties, so investment property owners need not apply.
According to a source briefed on the plan, borrowers who have 3 percent or more home equity would also not be eligible for the freeze, and borrowers with credit scores below 660 will be first in line.
The plan identifies three classes of at-risk borrowers:
– Strong borrowers facing an interest-rate reset will be helped into FHA fixed-rate mortgages, and won’t be eligible for an interest rate freeze.
– Borrowers with credit scores below 660 that have not increased by 10 percent since the origination of the mortgage in question will be fast-tracked for a loan modification, though borrowers with higher scores may also qualify.
– And finally struggling borrowers who aren’t able to afford even a modified loan will end up facing foreclosure.
It looks like the proposal will only help a small group of homeowners, though others will receive assistance from individual mortgage lenders and through other government agencies like the FHA.
According to a CreditSights report released Tuesday, the Bush Administration’s recent mortgage interest rate freeze proposal will likely create more problems than solutions for most homeowners.
The report claims the freeze plan will undermine the viability of the secondary market that has played a key role in providing mortgage loans, and will set in place similar expectations for Alt-A borrowers who face resets in coming years.
Creditsights analyst Christian Stracke noted that fifty percent of mortgage loans since 2002 have been made available via lending from the securitization markets, and said loan modifications would reduce the value of residential mortgage backed securities (RMBS).
“The potential contagion into the broader RMBS market could jeopardize the extension of credit through the securitization market, further undermining the benefits generated from the modification plan,” said Stracke.
He also argued that Alt-A mortgage resets could turn out to be just as bad as their subprime brethren, forcing the government to step in yet again to assist another set of at-risk borrowers.
“The combination of option adjustable rate mortgages and traditional Alt-A adjustable rate mortgage resets will be just as bad, if not worse, in terms of the absolute par loan dollar amount as the subprime reset problem, although it is not set to peak until 2010-2011,” Stracke said.
“Assuming the housing market has not shaken off the current slump by 2010, the wave of resets could create yet another wave of foreclosures among a class of homeowners that is going to remember the forbearance offered to subprime borrowers all too vividly,” he added.
Stracke also believes homeowners will lie about their income, and/or intentionally damage their credit scores to attain eligibility for the loan modification program.
“We find it hard to believe that borrowers who have too much income and/or too high credit scores to qualify for the modification will not find some way to convince their mortgage servicers that they do in fact qualify,” he wrote.
“The incentive to lie, or even to damage one’s own credit score, is too high,” he added.