By Nick Timiraos
Fannie Mae’s announcement last week that it would seek tougher penalties against borrowers who walk away from homes when they have the capacity to pay has sparked all types of outrage.
The company said it would step up efforts to pursue deficiency judgment—seeking to recoup the difference between the loan balance and the net proceeds of the foreclosure sale—against so-called “strategic” defaulters in states where such suits are allowed. Fannie also will lengthen to seven years, from five, the amount of time borrowers who go through a foreclosure must wait before getting a new loan.
Many are asking the same question: How will Fannie determine whether borrowers default when they have the capacity to pay?
The answer can be found in this lender bulletin Fannie issued last week. Any borrower who can’t demonstrate hardship, an effort to seek a workout with a lender, or other “extenuating circumstances” that prompted the foreclosure will be subject to the longer waiting period. Those who do supply such proof will see a waiting period of as little as three years.
Fannie says it’s making the change because it wants to encourage borrowers to seek help from their lenders before reverting to foreclosure.
But there’s another message here, notes financial publisher HSH.com: if foreclosure might be in your future, keep excellent notes of your efforts to seek a workout and of your financial situation if you want to get a loan in the next seven years.
So has Fannie made the right call?
“I say it’s about time,” says SmartMoney columnist James B. Stewart, who offered his two cents in Wednesday’s column:
These relatively affluent borrowers should pay a price—even if it is a modest one—for walking away from a contract. As it is, reports have been proliferating about homeowners who simply stop paying their mortgages, stay in their comfortable homes rent-free for the 18 months to two years or more it can take for the lender to foreclose, then get another government-backed loan and buy a new house. Who is to say they won’t do it all over again?…So I was baffled by critics who equate this new policy to things like debtor’s prison. Asking people to pay their mortgages when they can afford to is hardly locking people in a prison for the rest of their lives.These owners chose their homes and presumably liked them. They had no guarantee that housing prices would appreciate indefinitely and never decline.
At the end of the other spectrum is Brent White, the University of Arizona law professor who says borrowers should not feel bad about walking away from underwater loans:
Fannie Mae’s plan … will, in effect, lock borrowers into a Catch-22 where they are fearful for their financial future if they default and fearful if they do not. The success of Fannie’s approach will depend on making borrowers more afraid for their financial future if they defaulted than if they stay in their deeply underwater homes….Fannie’s new approach will just make things worse for underwater homeowners—in effect punishing the victims of the housing crisis that Fannie Mae played a large part in creating. But rather than take its lumps, Fannie seems intent on keeping as much of the burden of the housing collapse as possible on the backs of suffering homeowners.Fannie Mae should be ashamed for punishing rather than assisting the millions of underwater homeowners who did nothing wrong but buy a house at the wrong time—and are now facing financial ruin as a result. For these homeowners, strategic default is the best bad choice to save their financial future.
Such criticism is largely not warranted, says Thomas Lawler, a former Fannie Mae economist, because the company, together with the Obama administration, has demonstrated that it will “bend over backwards to develop programs to help struggling borrowers”:
Fannie is targeting borrowers who just ain’t paying nuffin’, ain’t talking with their servicer, ain’t taking advantage of the myriad of options offered by Fannie (including not just mods but short sales, [deeds-in-lieu of foreclosure], etc), and yet have the ‘capacity’ to pay their mortgage, or at least pay sumpin’!
Readers, what do you think of Fannie’s get-tough stance towards potential walkaways?
