Learn the rules of Fannie Mae before buying a home from the agency

September 30, 2011

Looking to buy a home from Fannie Mae? You’d better hurry. According to its most recent SEC filing, only 135,719 single-family properties were in Fannie Mae’s inventory at the end of June.

Fannie Mae, which ended up with hundreds of thousands of homes as residents struggled to keep up with their mortgages in recent years, is looking to sell them with incentives for buyers.

During the six-month period ending June 30, 2011, Fannie Mae acquired 107,246 homes through foreclosure but disposed of 134,016 homes.

Homes acquired by foreclosure or similar means are referred to as real estate owned (REO).

The pipeline of REO has remained relatively flat. The seriously delinquent rate for Fannie Mae mortgages was constant at 4.08 percent between June and July.

Of the homes sold, the vast majority were sold to homebuyers in individually negotiated transactions versus bulk transactions sold to investors.

Some homebuyers and investors are interested in buying Fannie Mae homes because the company offers favorable terms, but you must factor into your offer price the additional costs of conducting an inspection, title search and surveys.

Fannie Mae does not directly sell homes; it only sell homes through real estate brokers. Fannie Mae lists its homes on a Web site called Homepath.com. That site is easily searchable by state, town, Zip code, price, number of bedrooms or baths; it provides detailed information about the listings and the listing agent’s contact information.

If you find a home you are interested in buying, you can contact the listing agent directly. If you are already working with a buyer-broker, he or she can contact the listing agent on your behalf. But buyer beware: Buying a Fannie Mae home is different than a traditional private sale.

Fannie Mae’s homes are available to owner occupants as well as investors. Owner occupants are buyers who certify that they will move into the home as their principal residence within 60 days from settlement and remain in that home as their principal residence for at least one year. Fraudulent owner occupant certifications may result in loss of your earnest money deposit and a $10,000 penalty. Owner occupants are encouraged by a program called the “First Look” system, which provides that for the first 15 days of the listing, only offers from prospective owner occupants will be considered.

After the First Look period expires, anyone, including investors, can submit an offer on that home. Prospective home buyers may also be able to take advantage of Fannie Mae-approved lenders offering favorable mortgage loans for the acquisition, as well as the renovation of the REO. Twenty-eight approved lenders and six approved home renovation lenders are in Washington, D.C. The state-by-state list of those approved lenders is available online.

Until Oct. 31, Fannie Mae is also offering additional incentives, such as offering 3.5 percent cash credit toward buyer’s closing costs and a $1,200 bonus payable to the selling real estate agent.

Once you find a home that you would like to buy, you must submit a written purchase offer through a licensed real estate agent. Fannie Mae will consider standard contract contingencies such as financing, appraisal or home inspection. Although there is no specific contract language that you must use, you must submit a specific 13-page Fannie Mae addendum, which is available online. Prospective buyers must read and understand the terms and conditions of that addendum. They are well advised to consult with a real estate broker or real estate attorney to explain the legal implications of this addendum.

This addendum eliminates virtually all of the protections that are usually afforded to a home buyer in a conventional home purchase.

Since Fannie Mae has acquired its REO from distressed homeowners and has never actually occupied these homes, the agency sells them in “as-is” condition.

Many of the homes Fannie May acquires are not even in saleable condition and must undergo repairs before Fannie Mae will even market them for sale.

Even when Fannie Mae makes basic repairs sufficient to make the home saleable, those repairs are not warranted or guaranteed in any way.

Fannie Mae also expressly disclaims any liability for latent defects, such as mold.

Consequently, home buyers need to conduct rigorous inspections. Those inspections should include a comprehensive home inspection — including termite, radon and, if applicable, specific fireplace, well and septic inspections.

Fannie Mae does not generally warrant the title to the property and discloses that its sales may be subject to further court review or even redemption by the former homeowner. So a full title search and a full boundary line survey should be undertaken to discover if there are any title or survey problems.

Fannie Mae housing may allow you to buy a home on favorable conditions, but you must also consider the cost of conducting any deferred maintenance — and making any repairs to make your new house a dream home.

Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord, settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.

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