Fannie Mae Gets Tough With Walk-Away Mortgage Defaulters
Alex Finkelstein from the Real Estate Channel brings us an article that may impact quite a few people. The subject of “strategic defaults” or “Walk Aways” has been the topic of conversation at cocktail parties or around water coolers for sometime. Simply put, a strategic default involves an individual who has no hardship and can afford to make payments but chooses not to.
According to Mr. Finkelstein:
“Under the new rules:
- The five-year waiting period is eliminated.
- Borrowers who can’t document “extenuating circumstances” or show that they made an effort with their lender to avoid foreclosure will have to wait seven years to get a new loan.
- Those who can demonstrate hardship or attempted a workout with their lender may have to wait only three years.
- Fannie plans to step up legal actions to seek deficiency judgments in states that allow lenders to go after borrowers’ other assets. In addition,
- Fannie will instruct its lender partners to monitor delinquent loans owned by Fannie, and recommend cases that warrant attention.”
In my opinion the biggest detriment for strategic defaults revolves around going after deficiency judgments. I’m not sure that tacking on a few extra years to the “waiting period” required to secure a new loan will make much of a difference.
Fannie Mae Gets Tough With Walk-Away Mortgage Defaulters
Posted by Alex Finkelstein
The good times are gone for residential mortgage defaulters in the U.S.
Fannie Mae has just changed the rules of the game for people who walk from their home loans, better known as strategic loan defaults.
The government-owned agency that backs up loans from lenders says it will lock out borrowers from getting a new loan for seven years if they default on a mortgage they could afford to pay, the Wall Street Journal reports.
Under the new rules:
- The five-year waiting period is eliminated.
- Borrowers who can’t document “extenuating circumstances” or show that they made an effort with their lender to avoid foreclosure will have to wait seven years to get a new loan.
- Those who can demonstrate hardship or attempted a workout with their lender may have to wait only three years.
- Fannie plans to step up legal actions to seek deficiency judgments in states that allow lenders to go after borrowers’ other assets. In addition,
- Fannie will instruct its lender partners to monitor delinquent loans owned by Fannie, and recommend cases that warrant attention.
Fannie Mae is taking the new steps after finding:
- The majority of the defaulters are in Florida, Nevada and Arizona Nearly one in four homeowners with a mortgage is under water, or owes more than their home is worth, according to CoreLogic,
- A Morgan Stanley report estimates that around 12% of all mortgage defaults in February were ‘strategic’, meaning homeowners were financially able to pay on the loan but chose not to do so.
- In 2008, Fannie revised to five years from four the period that borrowers with a foreclosure must wait before they are eligible for a new loan.
The WSJ reports that even as Fannie Mae steps up penalties, the agency is preparing to reduce waiting periods for borrowers facing hardship who surrender their homes and avoid foreclosure.
Under previously announced rules that take effect next month, Fannie will reduce waiting periods to two years for borrowers who agree to transfer their homes to the company through a “deed in lieu of foreclosure,” or who complete short sales, where homes are sold for less than the amount owed.
The move to lock out borrowers from getting a new loan for seven years represents the latest effort by the mortgage industry to prevent a new wave of losses that could result if more borrowers who can afford their monthly payments instead opt to “strategically” default on loans, because they owe far more than their homes are worth.
Terence Edwards
“Walking away from a mortgage is bad for borrowers and bad for communities, and our approach is meant to deter the disturbing trend toward strategic defaulting,” Terence Edwards, Fannie’s executive vice president for credit portfolio management, said in a prepared statement.
Fannie’s move comes amid greater concern that it has become socially acceptable for borrowers to stop paying their loans, and that such a shift could exacerbate the housing bust. Those worries are particularly acute in Arizona, Nevada, Florida and other hard-hit housing markets where it could take years for borrowers to return to positive equity.
Fannie Mae’s smaller sibling, Freddie Mac, also requires borrowers with a foreclosure to wait at least five years. Foreclosures can stay on a credit report for up to seven years.