7 Year Penalty For Walking Away From Mortgage
Walking away from a mortgage can now result in a 7 year penaly imposed by Fannie Mae.
In an effort to mitigate losses incurred from borrowers walking away from their mortgage because they owe more than the home value, Fannie Mae said that those who had the capacity to pay the mortgage or did not attempt a foreclosure alternative program would be ineligible for a new mortgage for a period of 7 years.
High loan to values and dropping home values put many homeowners in a situation where they are “underwater”, owing far more than their home is worth. Walking away from the mortgage creates ethical as well as credit issues, but has become more of an acceptable choice, even with homeowners who can still afford to make their mortgage payments.
Fannie Mae, one of the primary sources of home financing in the U.S., continues to face major losses from mortgage defaults and foreclosures. Their plan is to try and prevent more losses by threatening to lock out “strategic defaulters” from financing another home for 7 years after a foreclosure. Borrowers who can prove 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 those who strategically walk away from a mortgage is 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 Fannie Mae’s strategy of locking out borrowers who strategically default on their mortgage work? Not unless other government sources of home financing, such as, Freddie Mac and FHA adopt similar restrictive mortgage default policies. Also, having a foreclosure added to a credit report can prevent a borrower from qualifying for a mortgage for at least two years, which may be a sufficient deterrent for borrowers who still have good credit.
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 the value of a home could be somewhat discouraging. The idea of being stuck with a bad real estate asset that may not reach a break-even point for many years may be enough motivation to walk away.
Written by R. Smith: Home Loan, Mortgage Quote, New Homes Chula Vista
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