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Fannie Mae Gets Tough With Mortgage Loan Walk-Aways

In a new get-tough mode, Fannie Mae says it will cut off mortgage financing for as long as seven years in cases where borrowers walk away from mortgage loans. In addition, Fannie Mae says it will seek deficiency judgments when possible.

Borrowers don’t have to walk away, says the company. “Troubled borrowers who work with their servicers, and provide information to help the servicer assess their situation, can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. A borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances.”

The announcement is the latest in a series from various lenders and loan buyers that concern so-called strategic walk-aways, individuals who refuse to pay their mortgage even though they have the financial capacity to do so.

Problems

There are several problems with the get-tough policy:


First, and obviously, why should residential borrowers be unable to walk away from mortgage loans when walking away is a common commercial practice? Just consider that in Manhattan the Stuyvesant Town-Peter Cooper Village complex was bought for $5.6 billion in 2006. The property is now in bankruptcy, with a first-lien debt of some $3.66 billion according to Bloomberg News.

Does anyone seriously think that the 2006 buyers, Tishman Speyer Properties LP and BlackRock Inc., entities with huge assets, will no longer be able to get a mortgage? How come the same standard doesn’t apply to a borrower who qualified for FHA or VA financing in 2006 but was sold a toxic loan?

Second, in about a third of the states neither Fannie Mae nor anyone else can get a deficiency judgment when a residential mortgage fails. The Fannie Mae policy implicitly punishes borrowers in some states but not in others, a hint that other states should dump pro-bank deficiency judgment laws.

Third, Fannie Mae says “a borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances.” And just who is going to determine which circumstances of “extenuating” and which are not? Will a borrower with an option ARM be treated the same as a borrower who cannot make payments on a conventional mortgage? That hardly seems reasonable.

Here’s the question: What will Fannie Mae do about the mortgage lemons sold to borrowers? Will such loans be recalled?

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Posted in: Mortgages

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