Here’s a short description of a new mortgage product feature Fannie Mae and/or Freddie Mac could offer that would create new home ownership opportunities for non-traditional buyer groups and help people in certain situations (ie. divorce; shifting family composition…) stay in their homes. And although this product would be beneficial in any part of the housing cycle, it would be especially valuable in today’s era of rising interest rates.
Concept
For a fee, lenders would release up to 50% of borrower[1] from their mortgage obligations and simultaneously substitute in new borrower(s) of equal or stronger financial capacity without changing any terms of the mortgage (ie. interest rate, term…). The program could be structured to either re-underwrite the entire borrower group or just the ‘substitute’ borrower(s). In either case, ownership interest in the property would simultaneously transition to the revised set of borrowers. This would not be deemed an Assignment or Assumption under the GSE guidelines.
Fees for this service would cover underwriting and processing, and should be significantly lower than the cost of a full refinance since there would be no need to originate a new loan or re-appraise the property.
Applicability
Partial release and substitutions would provide simpler, faster, and less expensive alternatives to refinancing or sale in multiple residential real estate situations, including:
- Partial turnover of ownership in shared homes purchased with traditional mortgage financing
- When a couple with a joint mortgage separates and one member desires to remain in the house with a new housemate/borrower
- When borrowers at risk of default or foreclosure could hold onto their property by bringing on an additional or substitute owner/borrower with stronger credit
- Creating a way out for a co-borrower (ie. Guarantor) on a home purchase after the primary borrower’s financial capacity improves sufficiently and/or a new co-borrower with suitable financial capacity agrees to take on that responsibility.
Eligibility
- Standard 1st lien position mortgages on 1-4 unit properties
- Optimal: A partial release and substitution feature would be offered as an option on existing and new mortgages.
- Alternative: New mortgage products with this feature would be created, and only such mortgages would be eligible for full or partial assumption.
Documentation
- Partial Release, Substitution, and Consent Agreement. This transfers all responsibilities within the original mortgage loan documents from the exiting borrower(s) to the substitute borrower(s). It would also release exiting borrower(s) from all liabilities related to the original mortgage.
- Deed to re-title of the property
- HUD-1 or other settlement statement and tax reporting documentation
Fees
- At application, lender would collect payment to cover underwriting costs.
- At closing, lender would collect payment for documentation and processing costs. Additional closing costs may include escrow, title, and recording fees.
[1] For the purpose of this summary, it’s assumed that all borrowers appear on the title, as is common in mortgage lending. However, similar forms of this proposal could apply to the substitution of Guarantors, Co-Signors, or Non-Occupant Co-Borrowers.