Dennis Norman
So, you have the money to pay on your ‘underwater’ mortgage, or to afford the reduced payment amount offered to you under the HAMP program, but think, rather than throw good money after bad you’ll just do like so many borrowers are doing and ‘walk-away‘? Well, if you have any plans to buy a house again in, say the next seven years, particularly with a Fannie Mae loan, think again.
Today Fannie Mae announced policy changes to “encourage borrowers to work with their servicers”. These policy changes include, a seven-year “lock-out” period for borrowers that default that had the capacity to pay, or did not complete a workout alternative offered to them in good faith. Those borrowers will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers that in fact do have extenuating circumstances may be eligible for a new home loan in a shorter period.
“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management. “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. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”
Thinking about a “Strategic Default”?
There has been a lot of talk lately about borrower’s that “strategically default”; for example, borrowers that have the ability to pay their mortgage payments but stop doing so in the hopes they can get out from under their home in an easier method than selling it in a down market, particularly if they are underwater on their mortgage.
Troubled borrowers who work with their servicers, and provide information to help the servicer assess their situation, can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. A borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances. These policy changes were announced in April, in Fannie Mae’s Selling Guide Announcement SEL-2010-05.
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I had been trying to tell people that strategic default was not as easy as it sounds. Lenders have your credit history, so they know if you are paying your car payment, cable bill and mobile phone bill. It always made sense that they would create a new category for people who did the “walk away” and blacklist them. I am very happy about this because there are able bodied, fully employed defaulters out there who are clogging up the works and keeping people who are genuinely in need from getting help.
This is a business decision. Why are the banks allowed to walk away from bad decisions and consumers not allowed to do so? For instance, Chase walked away from a multi-million dollar project in the suburbs of Boston and no one said a word. As for the 7 year punishment, that stays on your credit for 7 years regardless. And do you really think that Fannie Mae, who gave a mortgage to anyone and everyone including dead people, will resist lending to this class of people 3 years down the road. I think not, they are greedy just like the politicians that make the rules.