Fannie Mae Cracks Down on ‘Strategic’ Walk-Away Homeowners

Mortgage financing giant Fannie Mae said today it will punish homeowners who walk away from mortgage obligations – despite having the capacity to pay – or those who do not complete “a workout alternative in good faith.”

Under a new “lockout policy,” those borrowers will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.

But borrowers who have “extenuating circumstances” may be eligible for new loan in a shorter time-frame, Fannie Mae said in a statement.

Fannie said it will also take legal action to recoup the outstanding mortgage debt from borrowers who “strategically default” in jurisdictions that allow for deficiency judgments. 

Not all states allow lenders to sue homeowners after a foreclosure sale that has failed to fully satisfy loans outstanding. In the cases of recourse loans, a lender can bring a legal case if a homeowner defaults – but Obama Administration officials have been creating various programs – including mortgage reduction plans and some principal forgiveness – while urging servicers to work with borrowers.

“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, Fannie Mae’s 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.”

Cases of borrowers who can afford their mortgage payments but decide to “walk away” have been becoming so common that recent media reports have highlighted the trend, including a segment on CBS’s 60 Minutes that chronicled the epidemic of underwater mortgages.

It is estimated that as many as 40 percent of U.S. homeowners owe more in mortgages than the value of their properties – a trend fueled by the housing market collapse of two years ago. The hardest hit communities have yet to see a sustained recovery in home prices as the foreclosure crisis persists.   

“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,” Fannie said.

Fannie Mae, along with smaller sibling Freddie Mac, own about half of all U.S. mortgages. The two enterprises have been under U.S. conservatorship since September 2008, when huge losses from faltering mortgage securities forced the government’s virtual takeover.

An overhaul of the two entities is being planned by the Obama Administration, but both Fannie and Freddie have sought a total of 145 billion in bailouts thus far. That amount may exceed $300 billion by next year, regulators have said.

See Related Articles:

• Walking Away: Most in Survey Say No to Strategic Defaults
• Foreclosures & Walking Away: 60 Minutes Eyes an ‘Epidemic’