Fannie Wants To “Lockout” Borrowers Who Strategically Default

By Nick Timiraos

Fannie Mae said on Wednesday that it would “lockout” borrowers from getting a new loan for seven years if they “strategically default” on a property. The move is the latest effort by the mortgage industry to stem major losses that could result if more borrowers who can pay their mortgages choose to walk away because they owe far more than their homes are worth.

The government-owned mortgage-finance giant said that borrowers who walk away but have the capacity to pay for the loan or didn’t complete a foreclosure-alternative in good faith would be ineligible for seven years from getting a new loan backed by Fannie.  Borrowers with “extenuating circumstances” might be able to get a new loan sooner.

“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,” said Terence Edwards, Fannie’s executive vice president for credit portfolio management. The company said it would also take legal action to recoup the amount of lost mortgage debt in states that allow for such deficiency judgments.

The move comes amid greater concern that American homeowners, particularly in areas that have seen huge home price declines, may be ready to walk away from loans they can pay. Some 24% of homes with a mortgage are underwater, or worth less than the amount owed, according to CoreLogic, a real-estate research firm. A Morgan Stanley report estimated that around 12% of defaults in February had been strategic.

Even as Fannie tries to discourage homeowners from walking away or going into foreclosure, it is also relaxing some guidelines for borrowers that face hardship and make a good faith effort to avoid foreclosure. Under previously-announced rules that will take effect next month, some troubled borrowers who give up their homes could see that waiting period reduced. Homeowners that voluntarily transfer ownership through a “deed in lieu of foreclosure” or that complete a short sale, where a home is sold for less than the amount owed, will be eligible in two years to apply for a new mortgage backed by Fannie.

In 2008, Fannie revised to five years from four the amount of time borrowers with a foreclosure must wait to receive a home loan backed by the company. Foreclosures and short sales generally have the same effect on a borrower’s credit score and can stay on a credit report for up to seven years.

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