Fannie Mae Gets Tough On Mortgage Walk Aways

Homeowners who walk away from their mortgage may be penalized by Fannie Mae for 7 years.

In an effort to mitigate losses incurred from borrowers walking away from their mortgage because they owe more than the home value, Fannie Mae said that those who had the capacity to pay the mortgage or did not attempt a foreclosure alternative program would not be eligible for a mortgage for a 7 year period.

High loan to value mortgages and falling home values put many homeowners in a situation where they are “underwater”, owing far more than their home is worth. Walking away from the mortgage creates ethical as well as credit issues, but has become more of an acceptable choice, even with homeowners who can still afford to make their mortgage payments.

Fannie Mae, one of the primary sources of home financing in the U.S., continues to face major losses from mortgage defaults and foreclosures. Their plan is to try and prevent more losses by threatening to lock out “strategic defaulters” from financing another home for 7 years after a foreclosure. Borrowers who show extenuating circumstances or attempts to prevent the foreclosure, such as a loan modification, may have the waiting period reduced to 3 years.

While some advocates claim this action is necessary to discourage the growth of strategic mortgage defaults, there are others who say the move by Fannie Mae has the potential of derailing the recovery of the housing market. Their argument is that those who strategically walk away from a mortgage is because of negative equity, but they still have jobs and the required income to qualify for buying another home. Locking out these potential home buyers may reduce the demand for homes, which could affects home sales and eventually home values.

Will Fannie Mae’s strategy of trying to lock out borrowers who strategically default on their mortgage really work? Not unless other government sources of home financing, such as, Freddie Mac and FHA adopt similar restrictive mortgage default policies. Also, adding a foreclosure to a credit report typically precludes a borrower from qualifying for a mortgage for at least two years, which may be a sufficient deterrent for borrowers who still have good credit.

The motivation for a strategic mortgage default may depend on how deep a borrower is underwater on their home. Having a mortgage that’s twice the value of a home could be somewhat discouraging. The idea of being stuck with a bad real estate asset that may not reach a break-even point for many years may be enough motivation to walk away.

Written by R. Smith: Home Loan, Mortgage Quote, New Homes Chula Vista