Homeowners walking away from their mortgage may have limited financing options when buying another home.
Fannie Mae announced that borrowers who purposely default on their mortgage even though they have the capacity to make the payments would be ineligible for a new mortgage for a period of 7 years.
High mortgage balances and falling home values put many homeowners in a situation where they are “underwater”, owing far more than their home is worth. Walking away from the mortgage creates ethical as well as credit issues, but has become more of an acceptable choice, even with homeowners who can still afford to make their mortgage payments.
Fannie Mae, one of the primary sources of home financing in the U.S., continues to face major losses from mortgage defaults and foreclosures. Their plan is to try and prevent more losses by threatening to lock out “strategic defaulters” from financing another home for 7 years after a foreclosure. Borrowers who show extenuating circumstances or attempts to prevent the foreclosure, such as a loan modification, may have the waiting period reduced to 3 years.
Advocates claim this action is necessary to discourage the growth of strategic mortgage defaults, but there are others who say the move by Fannie Mae has the potential of derailing the recovery of the real estate market. Their argument is that strategic defaulters walk away from a mortgage because of negative equity, but they still have jobs and the required income to qualify for buying another home. Locking out these potential home buyers could essentially reduce the demand for homes, which affects sales and eventually home values.
Will trying to lock out borrowers who strategically default on their mortgage really work? Not unless other government sources of home financing, such as, Freddie Mac and FHA adopt similar restrictive mortgage default policies. Also, adding a foreclosure to a credit report typically precludes a borrower from qualifying for a mortgage for at least two years, which may be a sufficient deterrent for borrowers who still have good credit.
The level of motivation for a strategic mortgage default may depend on how deep a borrower is underwater on their home. Having a mortgage that’s twice as much as the value of a home could be somewhat discouraging. The prospect of being stuck with a losing investment that may not reach a break-even point for 10 years or more may be enough motivation to take walk.
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