Fannie Mae Implements 7 Year Lockout for Defaulters
I guess we had to expect this sometime, but it is surprising it took this long. Fannie Mae announced a new policy that will lockout defaulting borrowers from getting a Fannie Mae loan for up to 7 years. This will affect just borrowers that have chosen to let their properties go into foreclosure and ones that did not try to get short sales, deed-in-lieu, or loan modifications done.
This new policy was put in place to try and limit the number of “strategic defaults” that have started to happen. These are where a borrower evaluates the loss of equity in his property and decides it is better to let it go into foreclosure than to wait for the equity to recover. It is becoming more common as the values of homes and investment properties have dropped by up to 40% in some areas. These borrowers look at the MN MLS and see that their $400k property is now worth $200k and decide it could take up to 20 years for them to get back to what they paid for it. They decide it is better to take the loss and deal with a foreclosure on their record than wait 20 years.
Fannie Mae does not believe this type of default is legit. They are threatening legal action to recoup the mortgage deficiencies that were owed by the borrowers. This comes as no surprise as we all expect that after the dust settles, the lawyers will be in court filing judgments against every home owner that did a short sale in the last couple years. It will be a way for the banks to make up for the blistering losses they have seen in the last 2-3 years. Fannie Mae has even instructed their banks to watch for loans that should be flagged for litigation.
The new policy does state, although very ambiguously, that if the borrower has tried to work out loan with the bank they may eligible for a new Fannie Mae loan in just 3 years. My concern is how do you prove in 3 years that you had tried your best to do a short sale or loan modification and you failed and the property went into foreclosure? What will be the standard they measure how hard you tried? Think about trying to close on your new home and trying to convince the new underwriter that you did everything you could. This will make for an interesting next 10 years in real estate!
Read the full Fannie Mae press release here.
