Monday, April 14, 2008

Fannie and Freddie try to get tough on walkaways

(Naked Capitalism) While it isn't clear whether homeowners with the ability to pay abandoning mortgages is as widespread a problem as the press would lead one to believe (Tanta at Calculated Risk has been skeptical), Freddie and Fannie appear to be taking no chances.

The Chicago Tribune reports on measures taken by the two government sponsored enterprises (hat tip Doug) to combat this activity. As publicized earlier, Fannie has issued a blanket prohibition against lending to those who have a foreclosure on their record (five years unless there were "documented extenuating circumstances"). Freddie is even more tough-minded, with a longer ban against borrowers with foreclosures in their file, plus efforts to pursue deadbeats in states with laws that allow for it.

Nevertheless, it isn't clear what to make of this alleged trend. The reason for Tanta's doubt is that she suspects the borrowers in question in many cases aren't as able to make payments as the media alleged; my thought is that given the large number of no-docs, these walk-aways may have been speculators who are abandoning investment properties that they claimed were primary residences on their mortgage applications.

However, Credit Slips has suggested another angle: this trend, to the extent it is a trend, may be an unintended consequence of the 2005 bankruptcy law changes. If you don't qualify for a Chapter 7 bankruptcy (in general, if you have more than median income), it's easier to walk from your mortgage debt than your credit card liabilities.

From the Chicago Tribune:
The country's two largest sources of mortgage money have a blunt warning for anyone thinking about joining the "walkaway" trend, where homeowners stop making payments and months later send the house keys to their lender: You will feel the pain.

On March 31, Fannie Mae sent out new guidelines to lenders aimed at walkaways and other foreclosure situations. Fannie will prohibit foreclosed borrowers from getting another mortgage through it for five years, unless there are "documented extenuating circumstances." In those cases, the prohibition is three years.

Even after five years, borrowers with foreclosures in their files will have to put at least 10 percent down and need minimum FICO credit scores of 680.

Freddie Mac, Fannie's rival, counts foreclosures as major blots for seven years, and a senior official said the company is aggressively pursuing walkaways "to preserve our deficiency rights" where permitted by state law....

A number of Web sites have popped up claiming to cut the hassles of bailing out of a mortgage....

Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal eliminated to escape income-tax liability for the amount forgiven.

Walkaway borrowers, by contrast, have nothing forgiven, and the IRS may demand income taxes on the balance they never paid...

For borrowers who faced genuine financial hardships, underwriters are likely to be more sympathetic a few years down the road. But, regardless of what some promoter promises, don't expect to get a new home loan for five to seven years after walking away.

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