Fannie Mae announces a policy to withhold loans from strategic defaulters for seven years and pursue deficiency judgements. Do you think they will really do it?
Irvine Home Address … 28 BELMONTE Irvine, CA 92620
Resale Home Price …… $650,000
I'm the one to taste your death
Basking in your dying breath
Messenger of all demise
Point is where all die
Piercing, impaling no judgement, just punishment
Desecrate, annihilate assault with no regret
Born to kill sweep and clear
Staring down the face of fear
Slayer — Point
A few months ago, I chastised Fannie Mae for their stupid policy of reducing the punishment time for getting a new loan from 5 years to 2 years after a default. Perhaps someone there read the post Fannie Mae Encourages Strategic Default by Reducing Punishment Time for New Loan where I pointed out their new policy would encourage strategic default because now they are modifying their own policy to target those who walk away.
Fannie Mae Increases Penalties for Borrowers Who Walk Away
Seven-Year Lockout Policy for Strategic Defaulters
WASHINGTON, DC — Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.
So they have added two conditions: (1) must not have capacity to pay, or (2) must complete a loan modification in good faith.
How is that supposed to work?
First, who determines whether or not the borrower had capacity to pay? Let's say a borrower defaults, and three years from now, they want a new Fannie Mae loan. Is the burden of proof now on the borrower to document that they couldn't afford the payments years earlier when they defaulted? What is the criteria for establishing capacity? Who sets these criteria? Who keeps track of the documentation? Do you really think if the government — who still runs Fannie Mae — will turn away potential buyers in the future when they will be desperately needed?
Second, it is obvious that anyone planning to strategically default will simply get a loan modification and then stop paying. This must be obvious even to Fannie Mae who slipped in a "good faith" clause. Who will determine if the borrower made a good faith effort? And like the previous issue, if there is a need for borrowers to fill foreclosed homes, do you think the government will turn people away? I don't.
I commend Fannie Mae for trying to prevent strategic default, but all they are doing is bluffing existing borrowers with a threat they will never follow through on.
"We're taking these steps to highlight the importance of working with your servicer," said Terence Edwards, executive vice president for credit portfolio management. "Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time."
Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.
This is another empty threat. Fannie Mae like any servicer already has criteria for going after defaulting owners who have assets. Nothing has changed. Including this in the press release is an obvious bluff intended only to scare potential borrowers. Most people who strategically default — actually accelerated default — don't have any assets for Fannie Mae to recover.
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. These policy changes were announced in April, in Fannie Mae's Selling Guide Announcement SEL-2010-05.
Fannie Mae recognizes that strategic default is going to become a bigger problem as people realize that prices are not coming back and that they are merely renting their houses from Fannie Mae at an inflated rental rate. Previous policies of the GSEs have encouraged strategic default, and now that people are doing so in large numbers, they are resorting to empty threats to keep borrowers from walking away. Good idea, but it is too little too late. 
Another Ponzi implosion
The owners of today's featured property didn't put much into it, but they certainly pulled a great deal out of it. They are typical of the detritus washing through the Irvine market.
- The property was purchased on 12/8/2003 for $600,000. The owners used a $400,000 first mortgage, a $170,000 second mortgage, and a $30,000 down payment.
- On 7/26/2004 they obtained a $196,000 HELOC.
- On 1/26/2005 they refinanced with a $585,000 first mortgage and a $99,900 stand-alone second.
- On 3/31/2005 they refinanced again with a $585,000 Option ARM with a 1% teaser rate.
- On 12/14/2006 they refinanced with a $710,000 first mortgage.
- On 5/7/2007 they obtained a $131,000 HELOC.
- Total property debt is $841,000.
- Total mortgage equity withdrawal is $271,000.
- Total squatting time is at least 7 months.
Foreclosure Record
Recording Date: 04/28/2010
Document Type: Notice of Default
Irvine Home Address … 28 BELMONTE Irvine, CA 92620 
Resale Home Price … $650,000
Home Purchase Price … $600,000
Home Purchase Date …. 12/8/2003
Net Gain (Loss) ………. $11,000
Percent Change ………. 1.8%
Annual Appreciation … 1.2%
Cost of Ownership
————————————————-
$650,000 ………. Asking Price
$130,000 ………. 20% Down Conventional
4.80% …………… Mortgage Interest Rate
$520,000 ………. 30-Year Mortgage
$131,541 ………. Income Requirement
$2,728 ………. Monthly Mortgage Payment
$563 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$54 ………. Homeowners Insurance
$0 ………. Homeowners Association Fees
============================================
$3,346 ………. Monthly Cash Outlays
-$463 ………. Tax Savings (% of Interest and Property Tax)
-$648 ………. Equity Hidden in Payment
$238 ………. Lost Income to Down Payment (net of taxes)
$81 ………. Maintenance and Replacement Reserves
============================================
$2,555 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,500 ………. Furnishing and Move In @1%
$6,500 ………. Closing Costs @1%
$5,200 ………… Interest Points @1% of Loan
$130,000 ………. Down Payment
============================================
$148,200 ………. Total Cash Costs
$39,100 ………… Emergency Cash Reserves
============================================
$187,300 ………. Total Savings Needed
Property Details for 28 BELMONTE Irvine, CA 92620
——————————————————————————
Beds: 4
Baths: 2 full 1 part baths
Home size: 2,144 sq ft
($303 / sq ft)
Lot Size: 5,000 sq ft
Year Built: 1979
Days on Market: 43
Listing Updated: 40348
MLS Number: S616799
Property Type: Single Family, Residential
Community: Northwood
Tract: Ol
——————————————————————————
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Spacious home on a quiet cul-de-sac location. Living room with fireplace. Dining room with wet bar. Kitchen overlooks family room. Oversized master bedroom. Large private backyard. Three car attached garage.
I'm Back
I made it back from my vacation yesterday. I really did go off the grid for 10 days. I managed to not think about work or real estate for the entire trip (I'll talk more about my trip on the weekend Writer's Corner). It may take me a few days to get back into the swing of things. I need a vacation from my vacation.
I plowed through about 200 emails — and I apologize to anyone I may have missed responding to. I will try to go back through the comments, but I may miss a few.
I hope you all enjoyed your holiday weekend.
“Must complete a loan modification in good faith”
Code for:
Let us turn that 0 down option-ARM purchase money loan into a nice RECOURSE loan before you walk away!
E:
Yes, that is an astute oberservation.
Bay Area banks have tried that before, sending
out unsolicited refi offers, likely to make them
non-recourse.
I would have liked to have been the previous sellers – bought July 2002 $465k sold Dec 2003, $600k. Although, that is only 20% appreciation/yr.
How are price declines/market problems city/neighborhood dependent? I am seeing some new construction neighborhoods humming along, while others have ‘new’ homes that have been sitting for > 2 yrs and many empty lots.
It points to me that the valuation of the land is moving a lot faster than the value of the structure…
I’ve got a better idea–ban strategic defaulters for life. If someone walks away from a mortgage, they should rent. (There’s nothing wrong with renting, right?)
Ironically, banning them for life would better enable Fannie Mae to fulfill its mission–making house more affordable–than anything else it has done.
Not a terrible idea, but now you must define in detail what “strategic default” is in order to implement. That’s no easy task. Is a household defaulting at 33% front-end DTI doing so strategically? What if their back-end DTI is 65%? Will there be a hard cut-off at 50% back-end DTI? If so, wouldn’t strategic defaulters just make sure they were above that before defaulting (e.g. Who doesn’t want a new car?)?
IMHO, if Fannie Mae announces changes every 2-3 months, there is no long-term policy. They have no idea where they are going. All these promises are empty promises.
Fannie/Freddie can’t be certain of their existence a year from now, let alone their policy toward strategic default.
They have unlimited backing from the Treasury now. Privatize profits, socialize losses! This is the new RE mantra. Just close your eyes and say it over and over.
I like the term used above – accelerated default – because it is quite a bit more accurate than strategic default in a lot of cases. All arguements about morality aside, I think a lot of cases which are labeled as strategic defaults are really just people realizing that they will not be able to pay the balloon payment coming in a few years or make the payment when the adjustable rate resets. If that is the case, default is inevitable so why continue to sink money into the house? Additionally, the sooner one defaults, the sooner their credit will be repaired. Based on the size of the mortgages from 2005-2008, most people were immediately in a state of impending default. Accelerating the process when it becomes clear that they will have no chance to sell just to break even makes sense.
If Fannie Mae sticks to its policy — which is doubtful — it will be interesting to see if they make the distinction between those who merely accelerated the inevitable versus those who walked away without distress.
Lindsay Lohan in the Grant Wood painting?
Sacrilege! And yet somehow completely and utterly appropriate.
Welcome back!
Let me get this strait, these people moved in and with in a year needed a HELOC. So now the price is back to 2003 prices and is it affordable? If the former owner needed the HELOC it was not that affordable then. The economy now is worse than 2003, unemployment is worse than 2003, and incomes are stagnant if not down since 2003. I just don’t see how this is affordable to people in the long run.
But mortgage rates are lower than they were in 2003!!! They’re at historic lows, and now is the best time ever to buy a house and lock in that low rate before you’re priced out forever.
Well it looks like I have been right about interest rates… 4.375% is now available and 15 year fixed is creeping into the 3.s%. I was laughed at when I said interest rates would head to 3.5-4%. This will trigger price increases in areas like Irvine with high demand, but will not help the crash in employment challenged areas like Riverside.
In the short term, you have been proven right. The lack of investment opportunity in other areas is certainly driving money into mortgage loans, particularly since GSE insured loans are as good as government securities.
During the typical holding period of a mortgage loan (typically 7 years), it is far more likely that interest rates will rise. The people buying today will need to sell their properties to someone, and that someone will be using financing that will likely be much higher than today’s interest rates.
7 years is a long time. After we finally hit the low in interest rates inflation will easily absorb the impact of interest rates rising. Someone who bought in Irvine in January 2009 with 5.5% interest rates is in great shape with Irvine house prices up and interest rates headed down to 3.5-4%, as I projected.
As if the govt will determine who can or won’t pay. If so one earns $200,000 but spent the money on X, Y and Z, then has no money for the mortgage ($7000) is that can’t pay or won’t pay?
I’ve seen people that make good incomes “can’t pay the rent.” The other expense have higher prioriity than rent and food(e.g., parties, buying a pet snake, car, hair, golf, boat, vacations and on and on). There’s not “an must have” expense that will shock me.
Partyboy has a good point. I don’t know if they plan that far in advance. Usually it’s at a teaser rate (subsidized living) then rate change, followed by free rent for one to two years unless ….
I’ve heard from USCTrojan that this home is not in very good condition both outside and in.
Still looking for a nice, newer 3CWG in Irvine for around $700k…
Fannie will find someone stupid enough to say publicly (e.g., Facebook) that they are voluntarily defaulting even though they could pay.
If they are really smart, they will find someone whose career will be negatively impacted by them seeking to recover.
Then, they will sue, and publicize what is already technically public somewhere on the web. The newspapers will be all over it.
Then, many more state legislatures will make loans nonrecourse, because Fannie Mae will make some mistake in another case. They will somehow manage to go after exactly the wrong person, in the wrong way, and that will be all over the papers.
Either that, or Congress will just cut off their ability to pursue deficiency judgments.
If Fannie wanted to do something productive, they could go after people in cases of actual mortgage application fraud initiated by the borrower. That’s a target-rich environment. They could do this on fresh new applications too.
What about also going after mortgage application fraud initiated by the lender/broker?
In CA the one action rule can also apply. Pre-election BHO talked about making the loans unforgivable. Is that coming through the back door? If the loans becomes unforgivable, will the bankster also be held to unforgiveness or given another pass? I think the latter.