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
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.
Comments on this Story
truthteller | 07/05/10 12:16 PM | Reply
What a joke! Fannie Mae has decided to penalize a homeowner who walks away from a $400,000 mortgage because his home has collapsed in value to $200,000. To me, this looks like a pretty sensible decision on the part of that homeowner.
At the same time, Fannie Mae is in the middle of repurchasing roughly $117 billion of mortgages in mortgage-backed pools owned by institutional investors which are more than 120 days delinquent. Ready for this? Fannie is buying them back at full price even though they are worth no more than half the outstanding principle balance. Sounds like this is a super bailout for these investors (including banks) which bought these pools during the bubble years.
What foolish schemes will Fannie and Freddie come up with next?
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