Penalty For Walking Away From A Mortgage
Borrowers who walk away from their mortgage may be locked out by Fannie Mae for 7 years
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In order to cut losses from borrowers who strategically default on their mortgage because they owe more than the home is worth, Fannie Mae stated that borrowers who had the capacity to make loan payments, but walked away from their mortgage, would be ineligible for new home financing for a period of 7 years.
Falling real estate values resulted in many homeowners being "underwater", where they owe more than their home is worth. Strategic mortgage defaulting creates some ethical as well as credit issues, but it has become more of an acceptable choice, even with people who can still make their payments.
Fannie Mae is one of the main sources of mortgage financing for U.S. homeowners. They continue to face big losses from defaults and foreclosures. Their plan is to prevent some losses by locking out "strategic defaulters" from getting home financing for 7 years after a foreclosure. Borrowers who show extenuating circumstances or attempts to prevent the foreclosure, such as a loan modification, may have the waiting period reduced to 3 years.
While some advocates claim this action 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 could essentially reduce the demand for homes, which affects sales and eventually home values.
Will this strategy of trying to lock out strategic defaulters actually work? Not unless other government sources of home financing, such as, Freddie Mac and FHA adopt similar default policies.
The motivation for a strategic mortgage default may depend on how deep a borrower is underwater on their home. Having a mortgage that's twice as much as 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 walk.
by: Rick Smith.
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