I’m in the process of transferring my former Take Action! newsletters to “Posts” on this blog. In a few days you’ll be able to read all of them, refer back when you want to, and post comments.
For now, I’ll just refresh your memory about an earlier newsletter edition, and dramatic changes since that time.
In late May of this year, Fannie Mae announced that it would no longer buy mortgages on property with an unexpired right of redemption. In other words, if someone bought Alabama property at a foreclosure auction, or within one year after the foreclosure, that property was not eligible for a Fannie Mae loan. Since Fannie is the 800-pound gorilla these days for single family home loans, it meant that foreclosure purchasers in Alabama were practically shut down!
Congressman Spencer Bachus (6th Congressional District, Alabama) was successful in persuading Fannie to change its rules. Just a few days ago, on August 12, Fannie changed its “Selling Guide” to state that it will purchase loans on property with unexpired redemption rights. All of the following conditions MUST be met:
- The property must be located in a state where it is “common and customary” to sell a single-family property during a redemption period. (Alabama qualifies for this requirement)
- The mortgagee policy of title insurance must contain a specific exception for the unexpired right of redemption and affirmatively insure the mortgagee against all loss arising out of the exercise of any outstanding right of redemption, without qualification.
- If any party exercises a right to redeem the mortgaged property, the mortgage must be paid off directly out of the redemption proceeds with no requirement for any further action or claim for repayment. (This is required under Alabama law.)
- The lender must warrant that Fannie Mae will not incur any loss due to the exercise of any party of a right to redeem the mortgaged property.
In other words, you’ll need a redemption bond if the mortgage on your foreclosure purchase is larger than the sales price at the foreclosure auction. If you are unfamiliar with redemption bonds, here’s the low-down:
- In Alabama, the redemption price includes several components. It all starts with the price paid at the foreclosure auction–either the amount bid by the bank, or the amount actually paid by a 3rd party purchaser. Other charges can be added, but at a minimum the redeeming party will have to pay that amount, plus 12% interest.
- If the current owner has a mortgage on the property, the redeeming party must pay their redemption money to the mortgage lender until the mortgage is paid off, then the balance goes to the current owner. In this way, lenders of the post-foreclosure purchaser are partially protected if there is a redemption.
- Problems happen in the loan is larger than the foreclosure purchase price. If the property sold for $100,000 at foreclosure, but the new owner has a $125,000 mortgage on the property, the former owner might be able to redeem by paying only $112,000 or less. That is the $100,000 sales price plus 12% interest, assuming redemption happened exactly one year after the foreclosure.
- If the former owner can pay $112,000 to get the property back, but the new owner has a $125,000 morgage, then some lender is going to have $13,000 worth of risk–a loan balance with no collateral. The redemption bond insures the lender against that risk. A redemption bond will generally cost 1-1/2% of the whole new mortgage, NOT just the $13,000 of “exposure.” In other words, in my example, the redemption bond would cost $1,875.
We all thank Congressman Bachus for his hard work on this subject. Other states besides Alabama have limited rights of redemption after a foreclosure. If you live or invest in one of them, check with a local attorney or real estate broker to see if you can meet the Fannie requirements.
Thank you to Steve Shannon with RE/MAX Gulf Properties for sending me an email about Fannie Mae reversing its position on this issue.
If you have things you’d like me to check out, or things you’d like me to share with my readers, please let me know.