Short Sale Blog

Fannie Mae, in an effort to reduce the amount of 'strategic defaults' has issued new underwriting guidelines meant to punish those homeowners who walk away from a mortgage, even when they have the ability to pay it.

Researchers have stated that the main motivation to walk away from a mortgage is when there is negative equity. According to real estate research firm CoreLogic, about 11.3 million homeowners are underwater on their mortgages. Around 2.3 million additional homeowners are very close to being underwater. All told, almost one-third of all U.S. homeowners are either underwater or are close to it. CoreLogic projects that the typical underwater homeowner will not return to a position of positive equity until 2015 or 2016 at the earliest.

Fannie Mae is targeting homeowners who let their house go to foreclosure without evidence of a hardship or a good-faith attempt at a workout alternative. The penalty that Fannie Mae is implementing is two-fold. First, they have declared that strategic defaulters will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Secondly, they are vowing to aggressively pursue deficiencies in states that allow them to do so.

In order to encourage workouts, Fannie Mae, in April 2010, issued a revised underwriting bulletin, found here, that encourages homeowners to seek foreclosure alternatives such as short sales, by making the homeowner eligible for a new Fannie Mae backed loan in as little as two years. Compared to the waiting period of seven years post-foreclosure, it is clearly an advantage to pursue alternatives to foreclosure.

Let's take an example of a borrower who is underwater. Here at Seattle Short Sales, Inc. we work with hundreds of local homeowners, and can draw on a mountain of recent statistics. You can see all of the short sale approval letters here. On average, when the home is sold, the debt discounted is over $100,000 on an average property.

In our example, the homeowner previously purchased the property for $350,000 four years ago. The homeowner has a mortgage payment that is over $1,000 more than a rental payment would be for a suitable, alternative dwelling. If it takes until 2016 to regain their lost equity, that would mean they are making 84 housing payments for a $1,000 more than necessary, with nothing to show for it in the end. $84,000 put into the pocket of a homeowner in only six years is the reason why people voluntarily default.

Now, in Washington State, if the house goes to a Trustee Sale, the foreclosing senior lien holder, in most cases will not have a right to pursue the borrower for a deficiency. The junior non-foreclosing lien holder does retain the right. So, if the homeowner only has one mortgage, then there is a good chance that they could completely walk away unscathed, except for the restriction in using Fannie Mae money for the next seven years. If they have a junior lien, then the situation is more complicated.

In all cases, the homeowner will want to consult with a real estate and bankruptcy attorney to assess their options and compare the pros and cons of the situation.