7 Year Penalty For A Strategic Mortgage Default
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 be ineligible for a new mortgage for a period of 7 years.
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 a mortgage poses ethical as well as credit issues, but making that choice appears to have become more acceptable, even with homeowners who can still afford to make their mortgage payments.
Fannie Mae, one of the biggest 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 can prove extenuating circumstances or attempts to prevent the foreclosure, such as a loan modification, may have the waiting period reduced to 3 years.
Some advocates claim this policy change 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 strategic defaulters walk away from a mortgage 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 locking out borrowers who strategically default on their mortgage work? Not unless other home financing sources such as, Freddie Mac and FHA adopt similar 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 default may depend on how far a borrower is underwater. Having a mortgage that’s twice the value of a home could be somewhat discouraging. The prospect of being stuck with a losing investment that may not reach a break-even point for 10 years or more may be enough motivation to take a walk.
Written by R. Smith: Home Loan, Mortgage Quote, New Homes Chula Vista
