Fannie Mae Issues Warning to “Walkaways”
On March 31st Fannie Mae sent out letters to its lender network with stricter guidelines for those who choose to “walk away” from their mortgage without “documented extenuating circumstances.” The highlights are as follows:
- If you allow the bank to foreclose you are prohibited from attaining a mortgage through Fannie/Freddie for 5 years
- If you can provide the aforementioned “documented extenuating circumstances” that period is reduced to 3 years
- After the 3 or 5 years is up you will be required to make a 10% down payment
- You will also need a minimum FICO score of 680
Of course the quasi-government entities Fannie and Freddie are going to try to coerce homeowners to stay in their underwater homes with rapidly increasing negative equity. They don’t want their lenders to get stuck owning a massive real estate portfolio (which is already happening). But I have no sympathy for these lenders who created toxic loan products and pushed them on the wrong people to grow their own commissions and profits. This is how collateral works, people. You don’t pay, the bank takes the collateral back – the house. That is completely fair. And homeowners do and should have that option (as I have mentioned before, I have advised a close friend to walk away from her Sacramento condo). This letter to lenders is merely a scare tactic aimed at clearing up some of the rumors and hearsay about how a foreclosure really does affect one’s credit and future borrowing ability. For that reason, I have no problem with this letter and its contents.
The bottom line for me is this — I still feel in most cases if it makes sense to walk away, these ramifications are more than tolerable and after 3 to 5 years in most local markets, you will still be paying less for that home than what you paid at or near the peak of the cycle — which created your current upside down mortgage situation. So go rent for a lot less, take advantage of the flexibility of renting, and rebuild your credit over the next several years to be prepared to buy again when you are ready. And actually, 3 to 5 years from now might be right at or near the bottom of the cycle in many markets. Most reputable economists are predicting a very flat and drawn out pricing plateau after a bottom is reached anyway. So don’t fret if you are in a situation where it makes business sense to walk away. It might be the best decision you made in awhile.
