Fannie Mae (NYSE:FNM) and its little brother Freddie Mac announced on June 24th that they will punish borrowers who walk away from their properties if they think they can afford the payments. Fannie Mae stated they will enforce new policy changes designed to encourage borrowers who are in default to work closely with their servicers to come up with alternatives to foreclosure.
Ineligible for Another Loan for Seven Years
Borrower’s who walk-away and had the capacity to pay, or did not complete alternative work out opportunities in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Unfortunately, there are many California, Arizona and Nevada residents sitting on properties as much as 60% underwater and can’t sell or refinance their home.
Banks Failure to Modify Loans
The lenders are dragging their feet with loan modifications, even after a borrower has completed all 3 trial mod payments. People are just angry and simply worn out and frustrated with the loan modification process. The lenders lose paperwork, make mistakes and flat out lie to their borrowers and put them in foreclosure or offer an unaffordable repayment plan. The truth is the there should be even more pressure placed on the mortgage services to expedite the loan modification or short sale process. People are trying to work with their lenders and getting the short end of the stick along with the investors. The loan modification departments are apparently understaffed and disorganized based on what we have seen with our own eyes and the stories we’ve heard from borrowers being forced into bankruptcy to save their homes.
On the other hand, Terence Edwards, executive vice president for credit portfolio management says, "We're taking these steps to highlight the importance of working with your servicer," "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."
Legal Action Against "Strategic Default"
For those who decide to intentionally default on their mortgages, known as “strategically defaulting”, Fannie Mae announced they will take legal action to recoup the outstanding mortgage debt from borrowers in jurisdictions that allow for deficiency judgments. Fannie also says the company will be instructing its servicers to monitor delinquent loans facing foreclosure in an effort to go after these deficiency judgments.
Fannie and Freddie want borrowers to provide servicers financial information so they can help with foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. Unfortunately, a huge principal reduction isn’t on the loss mitigation menu. However, for the borrower with extenuating circumstances and a true hardship who pursues one of these options could be eligible for a new mortgage loan in three years and in as little as two years based on the borrower’s hardship. These policy changes were announced in April, in Fannie Mae's Selling Guide Announcement SEL-2010-05.
