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Fannie Mae Throws a Wrench Into Foreclosure Financing

Fannie Mae, a major backer of mortgages, announced on May 27, 2010 that there would be no FNMA backed loans for homes that were foreclosed but are still within state redemption periods.  Laws vary a lot between states, but the redemption period is a time frame within which a foreclosed homeowner can come back and reclaim the property.  In some states it's as short as 30 days, in others six months.

Of course, to reclaim a foreclosure, the previous owner must pay all associated costs, back taxes, attorney fees, improvement costs and more.  Due to the really large amounts of money involved, it's very rare that a homeowner reclaims a foreclosed property.  In the past, if there was a hesitation to lend on one of these properties, bonds could be purchased to handle the risk of redemption.  But, Fannie Mae is no longer accepting these bonds.

This could really slow the sellout of foreclosure inventories, as investors will be more cautious in buying homes that have significant time left in the redemption period.  Even if the investor is paying cash, if flipping the home, financing for the new buyer is going to be more difficult.  There's also been more activity from individual buyers, as they become less averse to purchasing foreclosures in today's economy and real estate markets.  Since most of these buyers are seeking mortgages, there will be a negative impact on these purchases as well.

Investors and individual buyers should check the redemption period for their state and check how long foreclosed homes have left before exiting this time frame.

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