Fannie Mae’s New Enforcement On Strategic Defaults

With more than 5 million home owners unable to make their monthly mortgage or currently in default, lending giant Fannie Mae has started to get tough on strategic default.

At the end of June, Fannie Mae announced that it would no longer look the other way from borrowers who walk on their mortgage. They also announced that the penalty would be a seven year ban from the GSE (Government Sponsored Enterprise) program. Additionally, Fannie plans to take legal action against borrowers who strategically default on their loans.

While Fannie Mae is standing tough on their decision, the reality is that with unemployment still at 9.5% or higher in some regions and a sluggish economy is having many home owners feel that they have no choice but to walk away from mortgages that they have no hope of catching up on.

 “We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, Fannie’s 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.”

Here’s how Fannie breaks it out:

  • Deed-in-Lieu of Foreclosure> — reduced from four years to two years with 20% down; four years with 10%.
  • Pre Foreclosure Sale — two years with 20% down; four years with 10%.
  • Short Sale— will be the same as pre-foreclosure sale
  • Strategic Default (Walk Away) — seven years.

Many experts are fearful that this move will contribute to the already dismally depressed home market by cutting out the government backed borrowers. Fannie Mae and Freddie Mac, fund more than 90% of new mortgages and so far, Freddie has not followed suit.

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