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.
Michelle said:
Don’t you always need 10% for fannie/freddie anyway? This seems like a pretty lightweight set of reinstatement rules. I doubt any of this will cause people who want to walk, to not do it.
April 14, 2008 9:58 AM
foreclosurefish said:
You’re right about these “warnings.” They really don’t hold much teeth, and people who suffer from foreclosure now are going to have a hard time getting a loan from anywhere in the next 3-5 years, no matter what. Unless they’re planning to put down 35% of the purchase price, people losing their homes now aren’t going to get a new mortgage loan for quite a while.
In fact, 3-5 years of saving up for a new house and eliminating other debt might be a better idea than continuing to throw money at a mortgage that is becoming more expensive by the day, relative to the value of the property.
April 14, 2008 12:12 PM
David Gordon said:
Well I knew you could go 5% down, but a quick search resulted in a 3% down loan someone used to sell in 2006:
http://www.communityinvestmentnetwork.org/single-news-item-states/article/nolow-down-payment-fannie-97/?tx_ttnews%5BbackPid%5D=1084&cHash=a99c9336b8
Not sure if there was a 100% financing option thru Fannie/Freddie.
April 14, 2008 2:38 PM
Hibryd said:
I have a little less sympathy for people walking away, just because the tons of people getting homes they couldn’t actually afford drove up prices for the rest of us. Yes, the banks were guilty of a lot, and they’re getting it square in the jaw right now, but I think bad buyers should have to pay for their mistakes too. It may make “business sense” to walk away from your bad investment, leave someone else with the tab, and buy again in 3 short years, but it sure doesn’t seem fair.
April 14, 2008 4:32 PM
David Gordon said:
Hibryd, I don’t disagree with what you are saying. Let me be clear that I don’t have sympathy for people walking away either. I am just saying they have that option.
We know that everyone got greedy – banks, agents, buyers, sellers, etc.
I wish the gov’t would stop trying to “fix” and prevent the correction by scheming to bail everyone out (except big banks – THAT is/was necessary for the well-being of our financial system). The quicker we allow things to correct naturally and rightfully, the sooner we can get on with normal business cycles.
April 14, 2008 4:42 PM
David said:
These rules will change when 2,000,000+ people “walk away.” Pretty soon there won’t be anybody to lend to in 3 years if they stick to these guidelines.
They changed the rules before, and they’ll do it again to drum up business in the deep dark nadir of the housing bust.
April 14, 2008 6:48 PM
David Gordon said:
Exactly, David. These are scare tactics, and they are understandable. But when we return to a sense of normalcy, if you will, in the lending arena, these banks are gonna need people to lend to so they can grow their portfolios and profits again. Just a predictable reaction to the current predicament.
April 14, 2008 7:48 PM
Janis Mara said:
David! You don’t really think two million people will walk away, do you?
April 15, 2008 8:15 PM
David Gordon said:
I can’t speak for David here, and I do hope he chimes back in, but I say there is a strong case and “benefit” for at least 2M people to walk away in the next year or two. Negative equity is not a good town to be in.
April 16, 2008 11:12 AM
David said:
2,000,000 nationwide? I think I’m being conservative.
“Negative equity” affects over 8,000,000 homeowners right now (Mark Zandi, Economy.com), nearly 9M in fact. Could less than 1/4 of them walk away? You bet.
With an additional 5-10% drop in prices nationwide, you’ll see nearly 14M of households underwater in the next year. could just 15% of those walk away?
If we return to “normal” expected price appreciation, even if you can keep making payments, if you’re down 20, 30, 40%, you’re looking at being underwater 5, 7, 10+ years. Even assuming Fannie’s new rules stick, it’s likely better for your finances to walk away, find a nice rental, save the difference and you’ll be shored up to buy again in 5-7 years…and probably at the same or even lower price than you bought at the first time.
I’m not the only one who can make that calculation. I might not have a very high opinion of overall financial literacy in the US, but I bet more than 15% of those underwater can…
April 16, 2008 1:48 PM
David Gordon said:
David, you are the man.
April 16, 2008 3:54 PM
Janis Mara said:
I concur, Mr. Gordon!
Glad to hear that you, David (you guyz need titles like “Imperial Emporer David I” and “The Magnificent Mr. Gordon,” so we can discriminate between you) think the walkees will be able to bounce back, but the scenario of deserted homes and devastated neighborhoods is scary. Squatters, crack houses, crime, remaining homeowners under siege – or am I overreacting?
April 16, 2008 10:53 PM
David Gordon said:
Oh Janis, you are too much! The other David is more deserving of a worldly title than me with his vast knowledge.
April 17, 2008 2:07 AM