Fannie Mae won't accept loans on foreclosures still in redemption period

Fannie Mae announced Thursday new guidelines that will make it harder to buy homes in foreclosure that are still within the redemption period required in some states.

Generally, the right of redemption allows sellers whose homes have gone into foreclosure a one-year period to redeem (or buy back) their homes. For example, in my state of Alabama, during this redemption period, a buyer of a foreclosure receives a Special Warranty Deed, citing the redemption period. And this is where Fannie Mae has a problem.

Here's the gist of Announcement SEL-2010-07 May 27, 2010 Selling Guide Updates

"Title Defect - Mortgage Loans Secured by Properties Subject to Unexpired Redemption Period

Certain state laws provide for a "redemption period" after a foreclosure or tax sale has occurred, during which time the prior owner may reclaim the property upon payment of all amounts owed. Unexpired redemption periods create an unacceptable title defect on the subject property, and do not conform to the existing policy that requires the property to have "good and marketable" title. As such, Fannie Mae is clarifying the Selling Guide to state that properties with unexpired redemption periods have unacceptable title defects. Therefore, these mortgage loans are not eligible for delivery to Fannie Mae until after the expiration of the redemption period. The purchase of additional insurance, a redemption bond or similar coverage during the redemption period does not remedy the title defect and the mortgage loan remains ineligible for delivery to Fannie Mae.

This topic was also updated to remove the paragraph pertaining to FHA and VA mortgage loans. Lenders must follow the applicable federal agency's requirements pertaining to allowable title exceptions.

Updated Selling Guide Topic

B7-2-05, Title Exceptions and Defects (Title Defect - Mortgage Loans Secured by Properties with Unexpired Redemption Periods)

Effective Dates This clarification is effective immediately

This clarification is effective immediately."

Regrettably, this announcement was made with little warning and it's effective immediately, which will undoubtedly derail some foreclosure purchases in process.

For more on this, here's the the May 27, 2010 announcement