Fannie Mae Penalty For Walk Away Foreclosures

Fannie Mae is imposing a new penalty on homeowners who walk away from a mortgage while they are still financially able to make the payments. These "strategic mortgage defaulters" will be penalized for up to 7 years after a foreclosure.

The government mortgage financing agency is suffering losses from borrowers who walk away from their mortgage obligation mainly because they owe more than their home is worth. Fannie Mae has said that strategic defaulters who had the capacity to pay the mortgage, or did not attempt a home foreclosure alternative program, would be ineligible to qualify for a new mortgage for 7 years.

Falling home values put many borrowers "underwater", meaning they owe more than their home is worth. Choosing to walk away from a mortgage creates some moral, as well as credit issues, but defaulting by choice has apparently become more socially acceptable, even among those who can still afford to make their monthly payments.

Fannie Mae, who is one of the biggest sources of home loans in the United States, continues to face major losses from home foreclosures. Their plan is to try and prevent more losses by "locking out" strategic mortgage defaulters from financing another home for 7 years after a foreclosure. Although, borrowers who can show extenuating circumstances or attempts to prevent the foreclosure, such as a loan modification, may have the waiting period reduced to 3 years.

Some claim that this move is necessary in order to discourage the growth of strategic defaults, and others say the decision by Fannie Mae has the potential of slowing the real estate recovery. 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 may affect sales and eventually home values.

Can this Fannie Mae strategy of locking out strategic mortgage defaulters actually work? It may not unless other government sources of financing, such as, Freddie Mac and FHA adopt similar foreclosure policies.

The level of motivation for a strategic mortgage default may depend on how far underwater a borrower is on their home. Having a mortgage that is twice as much as the value of a home could be somewhat motivating. The thought of being stuck with a losing real estate investment that may not reach a break-even point for many years could be enough for some to take a walk.

Article written by Rick Smith: Mortgage Refinance, Mortgage Quotes