“On March 31, Fannie Mae sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are “documented extenuating circumstances.” In those cases, the mortgage prohibition is for three years.
Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680.
Freddie Mac, Fannie’s rival, counts foreclosures as major credit blots for seven years, and a senior official said the company is now aggressively pursuing some walkaway borrowers “to preserve our deficiency rights” where permitted under state law.”
Fannie warns homeowners who walk away [SFGate]

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Comments from “Plugged-In” Readers

  1. Posted by San FronziScheme

    Oh, upside down “home-owers” must be soooooo scared.
    I’ll put this desperate threat in line with the quotes from the guy who said “Fence sitters will be sorry” and more NAR PR.
    http://www.voiceofsandiego.org/articles/2008/04/09/toscano/820theywillbesorry040908.txt?ref=patrick.net
    And this is a panic we see with a 7-9% national decrease. Just imagine what 20-25 or more% will do…

  2. Posted by Amen Corner

    Walk away, rent for five years, see out the nationwide housing mess, and then you’re all set to purchase again… seems like quite a deal to me for someone deeply underwater and paying far more in carrying costs than an equivalent rent.

  3. Posted by badlydrawnbear

    well with the bursting of the bubble going global and pessimism increasing nationally Fannie and Freddie are going to be busy.

  4. Posted by anon1

    Walk away, rent for five years, see out the nationwide housing mess, and then you’re all set to purchase again… seems like quite a deal to me for someone deeply underwater and paying far more in carrying costs than an equivalent rent.
    Nothing is guaranteed. What if the government inflates its way out of this mess? The savers will once again get screwed.
    If someone declares bankruptcy or is foreclosed, is it even possible to get a FICO score up to 680 after 5 years?

  5. Posted by fluj

    Is this “penalty” much different than the practical criteria? Five years is the only slap on the wrist here. Most of these folks are probably gonna take their sweet time to get back into the market anyway.

  6. Posted by Jimmy (Bitter Renter)

    What’s the big deal here? There will be lenders in the future who will write mortgages to people who have a foreclosure on their record (at a higher interest rate of course).
    Some banks will lend to people with high incomes, large downpayments and so-so credit. That market is going to be huge (2 million people at least) and profitable in the not-too-distant future.

  7. Posted by ex SF-er

    There will be lenders in the future who will write mortgages to people who have a foreclosure on their record (at a higher interest rate of course).
    This may or may not be true for some time (many years), at least in a practical sense.
    We are getting a pseudo-nationalization of the mortgage market.
    Right now there are few players in town: Fannie and Freddie. A little bit of Ginnie and FHA as well.
    very little business is occuring outside of those 4 agencies. and those agencies have an advantage given their government supported nature. (in other words, it is hard to compete with them due to their artificially lowered cost structure).
    There are obviously many other lender,s but nearly all of them are following the guidelines for the above 4 agencies.
    Credit tends to overshoot both ways. We saw over-loose lending for 6-8 years… now we will likely see overtightening for a while.
    it will be a while before lenders will be able to offload their portfolio to investors again if it doesn’t “conform” to fannie/freddie guidelines.
    especially with the new government interventions that will happen for sure.
    Don’t think that Congress et al will be happy and keep their noses out of the mortgage mess. more regulations/restrictions will come. it may even turn out to be ILLEGAL to offer certain products again in the future.
    sure, there may be an outfit here or there that will do it, but the rates will be HIGH HIGH HIGH. so high that the mortgage may not even be practical. (you know, like 15-20% with high downpaymetns or something like that)
    eventually, the regulation and the overtightening will improve again… but it will take a LONGGGGG time. (like over a decade most likely)
    people have taken the last 6-8 years and “normalized” those years. but they shouldn’t… 2001-2007 was a very ABNORMAL time period for credit and mortgages.
    5-6% mortgages are NOT normal historically. they are VERY low. A “normal” mortgage is more in the 7-8.5% range as example. it hasn’t been uncommon in the past to get near 10%+ as well…
    investors have moved on to the next big thing… it’ll be a while before MBS isn’t a 4-letter word.

  8. Posted by badlydrawnbear

    if I was an underwater homeowner and was watching the news today about food riots in third world countries I would stop paying the mortgage and start saving immediately so I can afford that $100 gallon milk … screw my credit rating, feeding my family would come first

  9. Posted by Dave

    I am always completely aghast when I read postings, and even newspaper articles, that put forth the notion that it’s okay to just walk away from your property and your mortgage if the value goes down or you just don’t feel like paying any more.
    Foreclosure should be the absolute last resort, when there are no other options left. Whatever happened to living up to your commitments? I’ve owned property that temporarily became worth less than what I owed on it. I kept on paying and eventually it turned around — but even if it hadn’t, I borrowed money with a promise to repay it, and I wouldn’t renege on that for anything.
    I’m amazed that few people today seem to feel any moral responsibility to repay what they’ve borrowed, if they no longer have equity to protect. As far as I’m concerned, anyone who defaults on a loan without the so-called “documented extenuating circumstances” shouldn’t ever be given another mortgage, at least not at market rates.
    People used to believe in something called personal responsibility, and that includes being held responsible for your own stupid financial decisions.

  10. Posted by ex SF-er

    Dave,
    although I totally agree with your sentiment (I’d never walk away, and people who do should never again get a mortgage), I also see the rationale of the walk-awayers…
    theoretically the mortgage is SECURED by the house as an asset.
    thus, technically when you walk away you are not breaching the contract as the bank simply takes the asset (assuming you don’t trash the place). the contract is written as “pay this or we take the asset”. the walk-awayers are simply exercising the latter option.
    sort of like a pawn shop.
    now, don’t get me wrong, I understand it’s a technicality… I’m just seeing where it comes from.
    it is exacerbated by what corporations are allowed to do/have done for decades. Reneg on their promises as soon as they are able. (offshore labor, going BK while giving execs big bonuses, much of the loan fraud of the last 5-10 years).
    in many ways, the banks have only themselves to blame. They played the FICO game… when everybody knows that this is exactly what happens when the “buyer” has no skin in the game.
    and FWIW:
    although I see a few allegorical stories here and there about walkaways, I have not seen true data that would support the idea.
    I think what’s really happening is
    -people were put into mortgages they had NO CHANCE of paying. (like $20k/year strawberry pickers in $750k homes)
    -fraud (there are tons of fraud rings around… they use strawbuyers to purchase homes, and then flip to each other and take the money)
    -speculators (who have multiple properties and no way to pay the bills… like the infamous Casey Serin)
    these people have no choice but to walk away. they have no cash to pay the bill. of course the bank would have known this had they done due diligence, but they didn’t care… they just wanted to package up another loan to sell to wall street.

  11. Posted by Dave

    Hi ex-SF-er, thanks for your comments.
    I don’t completely agree with you. Sure, a mortgage is secured by the property. That means if the borrower stops paying, the lender has recourse, they can foreclose on the property and theoretically, at least, recover most of the debt. It’s that inherent security that allows mortgage loans to carry a much lower interest rate than unsecured loans, and to be made for very large amounts of money.
    But if people’s attitudes about personal responsibility have become such that they feel that it’s perfectly okay to walk away from a loan when it no longer seems like a good deal for them, interest rates for everyone are going to have to rise significantly. I think lenders expect to take the risk that some buyers will end up unable to pay. I don’t think they expect to take the risk that buyers will just not feel like paying any more, regardless of their ability to do so.
    I probably sound like a cranky old man (and I’m not!) but I wonder what is happening to our country that people are not raised to know that it’s wrong to borrow money and then just decide not to pay it back.
    Of course I understand the motivations for walking away from a loan. I’ve had those motivations myself, but I know right from wrong and wouldn’t screw a lender unless I had no other options left.
    People are being given carte blanche to make stupid, risky financial decisions and when things go sour, they get to walk away virtually scot-free, and throw the burden of their bad decisions on the lender. I agree that the lenders are also culpable for funding such risky loans, and perhaps they need to learn a lesson here too.
    I’m really not grousing about people who walk away because they literally have no way to pay the bill. I think the lenders deserve what they get when they loan in those situations. I’m complaining about folks who walk away when the market turns and they have negative equity, even though their fundamental ability to write that mortgage check every month hasn’t changed. I think it’s essentially theft and fraud.
    Anyway, thanks for your comments, I appreciate the opportunity to bounce thoughts back and forth.

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