Fannie Mae Student Loan Mortgage Swap

HIghYa quoted me in Fannie Mae Student Loan Mortgage Swap: Should You Do It? It reads, in part,

This past week federal mortgage giant Fannie Mae announced it had created a new avenue for its borrowers to pay off student loans: the student loan mortgage swap.

The swap works like this, according to documentation published by Fannie Mae:

  • Fannie Mae mortgage borrowers get the benefit
  • They do a “cash-out” refinance
  • The money from that refinance is used to pay off your loan(s) in full

The concept of this is pretty elegant in our opinion. People who are saddled with student loans – the average grad has about $36,000 in debt at graduation – don’t usually stumble upon a huge chunk of money to pay off those loans.

If you’re lucky enough to own a home that’s gone up in value enough to create a sizeable difference between what your home is worth and what you owe, then Fannie Mae allows you to borrow against that amount (equity) by taking it out as cash you can use on a student loan.

The idea is that your mortgage rate will probably be lower than your student loan rate, which means instead of paying back your student loans at 6.5%, let’s say, you can now pay it back at your mortgage refi rate of, in most cases, less than 4.5%.

Basically, you’re swapping your student loan payments for mortgage payments, which is how this little financial maneuver gets its name.

The news first came out on April 25 in the form of a press release which said the mortgage swap was designed to offer the borrower “flexibility to pay off high-interest rate student loans” and get a lower mortgage rate.

The change was among two others that will, in theory, work in favor of potential or current homeowners who have student loan debt.

“These new policies provide three flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers,” Fannie Mae Vice President of Customer Solutions Jonathan Lawless said in the release.

What You Need to Know About Fannie Mae’s Student Loan Swap

Remember how we said that the money you get from your mortgage refinance can be used for a student loan or multiple student loans?

That happens because this refinance is what’s known as a cash-out refinance.

What is a Cash-Out Refinance?

A cash-out refinance is part of the general class of refinancing.

When you refinance your home, you’re basically selling the rest of what you owe to a lender who’s willing to let you pay them back at a lower interest rate than what you currently have.

The upside is that you have lower monthly payments because your interest rates are lower, but the downside is that your payments are lower because they’re most likely spread out over 30 years, or, at least, longer than what you had left on your original mortgage.

So, you’ll be paying less but you’ll be paying longer.

A cash-out refinance adds a twist to all this. You see, when you do a traditional refinance, you’re borrowing the amount you owe. However, in a cash-out refinance, you actually borrow more than you owe and the lender gives you the difference in cash.

Let’s say you owe $100,000 on your house at 7% with 20 years left. You want to take advantage of a cash-out refi, so you end up refinancing for $120,000 at 4.6% for 30 years.

Assuming all fees are paid for, you get $20,000 in cash. The lender gives you that cash because it’s yours – it comes from the equity in your home.

How the Fannie Mae Student Loan Swap Works

Fannie Mae’s new program takes the cash-out refinance a little further and says that you can only use your cash-out amount for student loans.

However, it’s not that easy. There are certain requirements you have to meet in order to be eligible for the program. Here’s a list of what you need to know:

  • The borrower has to have paid off at least one of their student loans
  • You’re only allowed to pay off your student loans, not loans other people are paying
  • The money must cover the entire loan(s), not just part of it/them
  • Your loan-to-value ratios must meet Fannie Mae’s eligibility matrix

We checked the Fannie Mae eligibility matrix and, at the time this article was published in April 2017, the maximum loan-to-value they’d allow on your principle residence was 80% for a fixed-rate mortgage and 75% on an adjustable rate mortgage.

In other words, they want to know that what you owe on the house is, at most, 80% of what it’s worth.

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Our Final Thoughts About Fannie Mae’s Student Loan Swap

The Fannie Mae student loan mortgage swap is certainly an innovative way to cut down on your student loan debt via equity in your home.

The pros of this kind of financial product are that, if cash-out refinance rates are lower than student loan rates, then you can stand to save money every month.

And because refis typically last 30 years, your monthly payments will most likely be lower than what they were when you were making payments on your mortgage and your student loan.

The main drawbacks of using a Fannie Mae cash-out refinance to pay off your loans is that you’ll put your home at a higher risk because house values could fall below the amount you borrowed on your refi.

Making a student loan mortgage swap also changes your debt from unsecured to secured. Brooklyn Law School Professor David Reiss reiterated this point in an email to us.

He said that borrowers need to “proceed carefully when they convert unsecured debt like a student loan into secured debt like a mortgage.”

The benefits are great, he said, but the dangers and risks are pretty acute.

“When debt is secured by a mortgage, it means that if a borrower defaults on the debt, the lender can foreclose on the borrower’s home,” David said. “Bottom line – proceed with caution!”

We think what Mark Kantrowitz and David Reiss have pointed out is extremely valuable. While a student loan mortgage swap may seem like a good way to pay off your debt, the fact that it swaps your unsecured debt for secured debt could mean trouble down the road.

The Mortgage After a Spouse’s Death

photo by Dr. Neil Clifton

BeSmartee.com quoted me in What Happens to My Mortgage When My Spouse Dies? It opens,

We would like to help by answering the question of what happens to your mortgage when your spouse dies, and we’ve asked several experts to chime in.

It’s bad enough when your spouse dies, but to also worry about what will happen with your mortgage only adds to the turmoil. We would like to help by answering the question of what happens to your mortgage when your spouse dies, and we’ve asked several experts to chime in.

When You Are on the Deed

If you and your spouse took out a mortgage loan together, you would then be responsible for paying the mortgage by yourself if your spouse dies. ”If the surviving spouses’ name is on the mortgage, they are now responsible for the entire mortgage,” says Randall R. Saxton, a Madison, MS, attorney. But you have inherited your spouses’ half of the home, which typically means you don’t need to change the title.

Your partner’s passing doesn’t disqualify the mortgage or let the lender call it in immediately, using a ”due-on-sale” clause. Such clauses let mortgage lenders demand the entire mortgage be paid if a new owner assumes the mortgage, or they take the house back. But the Garn-St. Germain Depository Institutions Act of 1982 prohibits lenders from using the due-on-sale clause when your spouse dies. But you would need to be able to handle the mortgage payments on your own to keep the house. ”While the lender cannot automatically foreclose due to the death of the mortgagee, they will be able to foreclose if the surviving spouse is unable to pay,” says Saxton.

Saxton has a suggestion: ”I always recommend life insurance policies, which would enable the surviving spouse to either pay off or maintain the payments of the mortgage.”

When You Are Not on the Deed

If you are not on the mortgage deed and your partner dies, your partner’s will should determine whether you get the house. If your partner didn’t have a will, your spouses’ assets will be distributed according to your state’s intestate laws.

Typically you, as the surviving spouse, will get your spouses’ assets after all expenses, such as funeral expenses and other debts, are paid. If there are enough assets in the estate, the mortgage will be paid. ”The estate will pay off the mortgage during probate,” says Aviva S. Pinto, CDFA, a wealth advisor at Bronfman E. L. Rothschild in New York City. ”If there are not sufficient assets to cover all debts, the house will have to be sold to pay off the debt,” says Pinto.

If you have children, your share is split with them. ”For example, if there is only one child of the deceased, the surviving spouse will own 50 percent of the property, and the child will own 50 percent of the property,” says Saxton. ”If neither [of you] pay the mortgage, the lender will be able to foreclose.”

Your Mortgage Lender Should Offer Help

No matter your particular situation, if your partner dies, you should contact your mortgage lender as soon as possible. They can help guide you on what will happen and your options. ”The Consumer Financial Protection Bureau has recently issued a rule to provide more protections to the survivors of a homeowner,” says David Reiss, professor of law at Brooklyn Law School. ”The rule gives widowed spouses some help in dealing with mortgage issues at a difficult time.”

Here are some specifics on how your mortgage lender can help, according to Reiss:

1. Mortgage servicers have to tell the widowed spouse about the documents that are necessary to confirm his or her status as a successor in interest to the deceased spouse.

2. Servicers are also required to provide many of the same notices and documents to the surviving spouse who is a successor in interest that the deceased spouse would have received.

Georgia Court Finds that MERS Was Within Its Right in Transferring and Assigning Deed, Along with Power of Sale, to Another Party

The court in deciding Brannigan v. Bank of Am. Corp., 2013 U.S. Dist. (N.D. Ga., 2013) found that MERS could transfer and assign the deed, along with the power of sale, to another party.

After Plaintiffs defaulted on their mortgage, U.S. Bank initiated non-judicial foreclosure proceedings. Plaintiffs Wade and Angelina Brannigan initiated this action and requested that the court set aside a foreclosure sale on the grounds of wrongful foreclosure.

Plaintiff asserted that U.S. Bank, Bank of America, the Albertelli Firm, and MERS conspired to file an alleged ‘Transfer and Assignment,’ whereby MERS purported to transfer, sell, convey and assign to U.S. Bank all of its right, title and interest in and to the security deed. Plaintiffs argued, “MERS retained no interest in their security deed to transfer, and said transfer and assignment were not only fraudulent but a legal nullity” as plaintiffs’ mortgage loan had already been assigned to LaSalle Bank.

In regards to the plaintiff’s claim against MERS, the court found that the plaintiffs executed a security deed listing MERS as grantee and nominee for the lender and its successors and assigns. By the terms of the security deed, MERS could transfer and assign the deed, along with the power of sale, to another party, and did so by transferring it to U.S. Bank. Moreover, the court noted that under Georgia law, the security deed assignee “may exercise any power therein contained,” including the power of sale in accordance with the terms of the deed. O.C.G.A. § 23-2-114.

Therefore, even if Plaintiffs had standing to challenge the assignment, by the terms in the security deed U.S. Bank was within its authority to foreclose after Plaintiffs’ default.

The court in deciding Brannigan v. Bank of Am. Corp., 2013 U.S. Dist. (N.D. Ga., 2013) agreed with the defendants that the plaintiffs’ complaint failed to state a claim upon which relief could be granted and was to be dismissed under Rule 12(b)(6).

Plaintiffs filed an action asserting several state-law claims related to wrongful foreclosure. The claims against the defendants also included: fraud, intentional misrepresentation, and deceit (Count One); negligent misrepresentation (Count Two); negligence (Count Three); wrongful foreclosure (Count Four); and violations of the Fair Credit Reporting Act (Count Six).

Plaintiffs contended that the defendants wrongfully foreclosed on their property.
Plaintiffs challenged the assignment of the security deed from MERS to U.S. Bank as wholly void, illegal, ineffective and insufficient to transfer any interest to anyone.

Defendants argued that the plaintiffs lacked standing to challenge the validity of the assignment. The court ultimately agreed. The court noted that the plaintiffs could not challenge the assignment’s validity because they were not parties to the assignment or intended third-party beneficiaries.

Next, the plaintiffs argued that the assignment from MERS to U.S. Bank was invalid because after the mortgage loan was assigned to LaSalle Bank, MERS retained no interest in the plaintiff’s security deed to transfer.

The court noted that the plaintiffs executed a security deed listing MERS as grantee and nominee for the lender and its successors and assigns. By the terms of the security deed, MERS could transfer and assign the deed, along with the power of sale, to another party, and did so by transferring it to U.S. Bank. Therefore, the court reasoned that even if the plaintiffs had standing to challenge the assignment, by the terms in the security deed, U.S. Bank was within its authority to foreclose after the plaintiffs’ default.

Finally, the plaintiffs claimed that the defendant Albertelli Firm’s notice of default was inadequate because it “failed to properly identify the secured creditor, note holder and loan servicer.” The court found that the defendants complied with Georgia’s notice requirements. Therefore, the plaintiff could not state a claim for wrongful foreclosure.

Georgia Court Dismisses RESPA, TILA, and HOEPA Claims

The court in deciding Mitchell v. Deutsche Bank Nat’l Trust Co., 2013 U.S. Dist. (N.D. Ga., 2013) granted the defendant’s motion to dismiss.

Plaintiffs Reginald and Jamela Mitchell claimed that the defendants Deutsche Bank National Trust Co. and MERS violated the Truth-in-Lending Act (“TILA”), the Real Estate Settlement Procedures Act (“RESPA”), the Home Ownership Equity Protection Act (“HOEPA”) and state law by commencing foreclosure proceedings against Plaintiffs’ home.

After consideration of the plaintiff’s assertions, the court concluded that the complaint failed to state a claim upon which relief could be granted.

Alabama Court Rejects “Split-the-Note” Theory

The court in deciding Gray v. MERSCORP, Inc., 2013 U.S. Dist. (N.D. Ala., 2013) rejected the split the note theory put forward by Gray.

This matter arose out of a note and mortgage executed in March 2007 by plaintiffs Clayburn Kyle Gray and Carrie Ann Gray, defendant Quicken Loans, Inc., and defendant MERS.

Plaintiffs’ resulting suit primarily consisted of two allegations: (1) that the defendant Quicken wrongfully and deceptively caused the plaintiffs’ entire ten-acre property to be encompassed by the mortgage and (2) that the defendant OneWest, to whom the mortgage was subsequently assigned by defendant MERS, was incapable of foreclosing on the mortgaged property, due to “a separation of the note and mortgage in this cause.”

Defendants filed a motion to dismiss, this was subsequently granted. The court noted that Alabama courts, have roundly rejected the “split the note” theory, thus rendering it ineffective and inapplicable in the present case.

California Court Denies Claims that Deficiencies Rendered any Security Interest in the Deed of Trust Invalid

The court in deciding Sollenne v. United States Bank Nat’l Ass’n, 2013 U.S. Dist. (S.D. Cal., 2013) ultimately found that the plaintiffs’ claims premised upon the securitization of the loan and violations of the PSA were to be dismissed. The court also found that the plaintiffs could not require the defendants to take any actions to prove their authority unless such factual allegations are presented.

Plaintiffs alleged three causes of action: 1) quiet title; 2) declaratory relief to determine the validity of the deed of trust on the date the note was assigned and to determine if any defendant has authority to foreclose; and 3) injunctive relief to stop further collection activity, including the sale of the property. Plaintiffs’ desired remedies also included a request for an order compelling the defendants to transfer or release legal title and any alleged encumbrances, and possession of the property to plaintiffs.

Plaintiffs also alleged that the procedures in the pooling and services agreement (PSA) for the trust had not been followed. They alleged that the note and the mortgage, the debt or obligation evidenced by the note and deed of trust were not properly assigned and transferred from CMG (the originator) to USBNA (the trustee of the Trust) in accordance with the PSA. Plaintiffs claimed the PSA was violated by a failure to complete the assignment before the closing date, and a failure to provide a complete and unbroken chain of transfers and assignments. Plaintiffs claimed that no perfected chain of title exists transferring the mortgage loan from CMG to the Trust.

In the alternative, Plaintiffs claimed that Nationstar alleged to be the holder and owner of the note and beneficiary of the deed of trust, but that the note identified the originator as the holder, and there is no perfected chain of title between CMG and Nationstar. Plaintiffs claimed that no documents or records have been produced to demonstrate the note or deed of trust was properly transferred prior to the closing date, and that any documents  transferring it after the closing date are void under the PSA.

Plaintiffs listed the following deficiencies which they contended render invalid any security interest in the deed of trust: 1) the separation of title, ownership and interest in the note and deed of trust; 2) the lack of assignments to or from the intervening entities when the loan was sold; 3) the failure to assign and transfer the beneficial interest in the DOT to Defendants in accordance with the PSA; 4) the failure to endorse, assign, and transfer the note to USBNA in accordance with the PSA and California law; 5) that there were no assignments of beneficiary or endorsements of the note to each intervening entity; and 6) Defendants violated terms of the PSA.

Ultimately, the court determined that the plaintiffs’ claims premised upon the securitization of the loan and violations of the PSA were to be dismissed. The court also found that the plaintiffs could not require the defendants to take any actions to prove their authority unless such factual allegations were presented.