Fannie Mae Cracking Down on Walk-Away Defaults
Get widgets
Print
Facebook
RSS- By:
- Kirk Haverkamp | June 25, 2010
Fannie Mae, the nation’s largest secondary mortgage lender, is taking steps to discourage borrowers from simply walking away from a mortgage where they owe more than the property is worth.
Borrowers who commit what is known as a “strategic default” on a mortgage they otherwise have the ability to pay will not be eligible for another Fannie Mae-backed mortgage for seven years after the date of foreclosure, compared to as little as three years for a borrower who can demonstrate extenuating circumstances.
"We're taking these steps to highlight the importance of working with your servicer," said Terence Edwards, a Fannie Mae spokesman. "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."
Will pursue collection actions
The agency also plans to take legal action to collect unpaid balances from borrowers who strategically default in jurisdictions that allow for deficiency judgments. However, in many states, mortgages are non-recourse loans, meaning the lender’s only option for collecting the debt is to foreclose on the property involved.
The new policy, announced this week, raises the question of how the lender will determine that a strategic default occurred. In many cases, the question of whether a borrower “voluntarily” defaulted becomes a judgment call as to whether the borrower truly had the resources to continue paying the mortgage.
Freddie Mac, Fannie Mae’s smaller sibling lender, has not indicated whether it plans to pursue a similar policy. Brad German, senior director of public relations for Freddie Mac, said the lender is studying the new Fannie Mae policy and will consider changes to its own policies as needed. Currently, Freddie Mac requires a five-year waiting period after any foreclosure due to financial mismanagement before a borrower can be considered again for a mortgage.
As many as one-third of foreclosures called voluntary
With an estimated one-quarter of all homeowners “underwater” on their mortgages, the issue of strategic defaults has been a growing one. A study released this spring by the University of Chicago’s Booth School of Business estimates that nearly one-third of all recent foreclosures are strategic, driven in part by a perception that borrowers can get away with it.
“With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments,” said Paolo Sapienza, co-author of the study.
University of Arizona law professor Brent White made a stir last year when he proposed that more homeowners ought to strategically default on their mortgages, equating it with businesses that walk away from bad investments and default on those loans.
Second liens may still be collectable
One major pitfall, aside from the damage to their credit, that can affect borrowers who choose to voluntarily stop paying their mortgage. Many underwater borrowers have second mortgages or other additional liens on the property that, due to declining home values, are not secured by any financial stake in the mortgaged property.
Because such liens are effectively not secured by any interest in the property, they may not be extinguished by a foreclosure, and borrowers may remain personally liable for them unless they resort to bankruptcy. There have been reports of some former homeowners who have been surprised to be subject to collection actions years after the foreclosure, once they are back on their feet again financially.
Call For Rates
800-419-1494
Speak to a lender now.
We will match calls to our toll free number with our network of lenders.See Today's Rates
Mortgage Quotes
National Rates
| Loan Type | Today | +/- |
|---|---|---|
| 30 yr fixed | 3.69 |
|
| 15 yr fixed | 3.00 |
|
| 5/1 ARM | 2.69 |
|
Rates may contain points
Browse Mortgage Rates
Featured Guides
Browse our comprehensive guides to popular topics related to mortgage and personal finance.