Fannie Mae to Penalize Strategic Defaulters

by braddhesi

Government-owned mortgage-finance titan Fannie Mae announced last week it would lock out borrowers from getting a new loan for seven years if they default on a mortgage they could afford to pay. The move represents the latest effort by the mortgage industry to prevent a new wave of losses that could result if more borrowers who could afford their monthly payments instead opt to strategically default on loans, because they owe far more than their homes are worth.

Fannie Mae’s move comes amid greater concern that it has become socially acceptable for borrowers to stop paying their loans. Those worries are acute in Arizona, Nevada, Florida and California where it could take years for borrowers to return to positive equity. Nearly one in four homeowners with a mortgage is underwater, or owes more than their home is worth. Last March, 31% of foreclosures were described as strategic by the borrowers themselves, compared with 22% in March 2009.

Borrowers who can’t document extenuating circumstances or show they made an effort with their lender to avoid foreclosure will have to wait seven years to get a new loan. Borrowers who can demonstrate hardship or attempted a workout with their lender may have to wait only three years. Fannie Mae will also reduce to two years, from four years, the amount of time a borrower that has gone through bankruptcy must wait before getting a new loan.

As a comparison, borrowers who default on FHA loans for any reason currently can’t get another loan insured by the agency for three years. Legislation pending in Congress would impose a lifetime ban on FHA loans to borrowers determined to have made a strategic default.