RealtorIrene Blogs about Northwestern NJ Real Estate - Hunterdon & Warren: June 2010

Strategic Defaulters (Walk-aways) - FNMA has had Enough & Will Pursue You

Wow!

FNMA is moving faster than bureaucratic red tape for a change.

June 23, 2010, FNMA released announcement SEL-2010-08 outlining changes to penalize homeowners that can afford their mortgages, but choose Strategic Default and walk-away from their mortgage responsibilities.

FNMA's announcement references the overtures they released in April 2010 in SEL-2010-05 to offer struggling homeowners options other than foreclosure - short sale, deed-in-lieu and loan modification.

FNMA is also threatening strategic defaulters with legal action to pursue them and recoup losses due to foreclosure in states that allow deficiency judgments.

These changes are to take effect in October 2010.

There are a lot questions that come to mind regarding this aggressive stance by FNMA.

1.  How in the world are they going to determine why a homeowner lost their home to foreclosure?

I would imagine they'll require lenders to request more documentation from borrowers that have a prior foreclosure when they apply for their next mortgage to show they didn't do a strategic default.

2.  What happens if a homeowner tries loan modification, short sale or deed-in-lieu, but their lender won't cooperate and forces them into foreclosure?

The only thing I can think of is homeowners are going to have to keep records of their attempts.  What will qualify as acceptable proof is anybody's guess at this point.

3.  That brings up another question - where are the penalties for lenders that basically force homeowers into foreclosure by losing their loan modification, short sale & deed-in-lieu paperwork and generally make the process a nightmare for homeowners? 

Come on FNMA - what's good for the goose is good for the gander!

4.  How is FNMA going to pursue strategic defaults and collect on them?

Last I looked, FNMA didn't have debt collectors on staff.  If they did, mabe they should be going after the millions in bonuses paid to their previous executives that cooked the books.  Fair is fair, right?  Is FNMA going to call in the FBI?  Can they cooperate with the IRS to pursue collection?  FNMA is now owned by the government and taxpayers can't default on government debt.  Wouldn't that be a nightmare - the IRS pursuing you to collect on your defaulted mortgage balance!

5.  How much extra is this going to cost borrowers?

Every time the government passes more regulation on the mortgage industry, it gets more expensive for borrowers.  It will take longer to document the reasons for foreclosure, slowing down the approval process and costing lenders more time which they will pass on to borrowers somehow.

6.  How much will this cost taxpayers?

We're already bailing out FNMA & FHLMC and it hasn't stopped as they keep losing money.  It's going to cost more to pursue collections.  Will they collect enough to offset that additional costs?  Oh wait, they're owned by the government now and since when is government worried about how much it spends?

7.  Will FNMA be going after companies that strategically default on their loans?

Again, fair is fair.  FNMA also makes loans to companies that buy apartment buildings.  There are a lot more foreclosures in that arena also.  Where's the announcement to get tougher on companies that choose strategic default to rid themselves of a money losing property?

Now don't misunderstand me, I'm not happy that my tax dollars go to prop up FNMA/FHLMC because they're losing money due to foreclosures - a growing percentage from strategic defaults.

I dealt with a doctor last year that walked awayfrom his home because he was upset about it being upside down.  Since he was retiring, he simply bought a "second home" in San Diego and let his home in Novi go to foreclosure.  Didn't even try a short sale. 

You can do what you want morally and legally, but he had more than enough to cover what he would have had to bring to a closing.

My real concern is question #2 above.  If FNMA wants to encourage homeowners to pursue foreclosure alternatives, what are homeowners to do if lenders fail to assist them? 

The whole HAMP (loan modification) process is a joke, despite the millions thrown at it.  Banks simply don't want to do them.

Short sales are slowly improving, but when it still takes an average of 3-6 months to complete them, how does FNMA expect that to be a realistic option?

I totally understand why FNMA is doing this, but fear the execution and consequences have not been thought through.
 

More Details about the Announcement

Here's FNMA's Press Release:

WASHINGTON, DC - Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative 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. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.

"We're taking these steps to highlight the importance of working with your servicer," said Terence Edwards, 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. 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."

Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.

Troubled borrowers who work with their servicers, and provide information to help the servicer assess their situation, can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. 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. These policy changes were announced in April, in Fannie Mae's Selling Guide Announcement SEL-2010-05.

Here's FNMA's updated foreclosure table:

Derogatory Event	Current Waiting Period Requirements	New Waiting Period Requirements
Foreclosure	5 years  Additional requirements apply after 5 years up to 7 years	7 years  No additional requirements apply
Exceptions to Waiting Period for Extenuating Circumstances
Foreclosure	3 years Additional requirements after 3 years up to 7 years:  Purchase, principal residence with maximum LTV ratio of lesser of 90% or maximum per the Eligibility Matrix  Limited cash-out refinance, all occupancy types, LTV ratios per the Eligibility Matrix	3 years Additional requirements after 3 years up to 7 years:  Lesser of 90% LTV ratio or maximum per the Eligibility Matrix  Purchase, principal residence  Limited cash-out refinance, all occupancy types

 MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY 

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