Fanny Mae has just changed the rules for residential mortgage defaulters.
The government-owned agency that backs up loans from lenders says it will lock out borrowers from getting a new loan for seven years if they walk away from a mortgage they could afford to pay. These strategic defaulters owe far more than their homes are worth and it would take years for the value of their home to recoup.
The policy changes are a result of these findings:
- 1 in 4 mortgages are underwater, according to real estate data firm CoreLogic.
- 12% of all mortgage defaults in February were strategic, according to a Morgan Stanley report.
- There are a growing number of people who find it socially acceptable to stop making payments and continue living in the house for months, even years.
The new rules state:
- Fannie Mae will block strategic defaulters from obtaining a new Fannie Mae backed loan for 7 years (previously 5 years)
- Fannie Mae also announced it would step up legal actions to seek deficiency judgments in states that allow lenders to go after borrowers’ other assets.
- Borrowers who can demonstrate legitimate hardship or attempt to work with their lender may only have to wait 3 years.
How does this affect investors?
As part of the new policy, Fannie Mae will reduce waiting period to 2 years for borrowers who agree to transfer the house to the lender through a “deed in lieu of foreclosure” or who complete short sales. This makes a short sale an even more attractive alternative if a borrower is underwater. The only dilemma in the strategic default vs. short sale debate is whether or not the lender will let the borrower complete one if there is no hardship.