Fannie Mae is trying to crack down on homeowners who choose to walk away from their home mortgage even though they are able to continue making the mortgage loan payments. These “strategic mortgage defaulters” may be penalized by Fannie Mae for up to 7 years after the home foreclosure has been settled.

The government owned mortgage agency is suffering huge losses from borrowers who voluntarily walk away from their home loan primarily because they owe more on the mortgage debt than the real estate 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 home loan for a period of 7 years.

High balance mortgages and falling real estate values have put many homeowners in a situation where they are “underwater”, meaning they owe more than their home is worth. Choosing to walk away from a mortgage does create some moral, as well as credit issues, but defaulting by choice has become more socially acceptable it seems, even among homeowners who can still afford to make their monthly mortgage payments.

Fannie Mae, who is one of the biggest sources of real estate financing in the United States, continues to face major losses from mortgage defaults and foreclosures. The purpose of this plan is to try and prevent more losses by threatening to “lock 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.

While some people claim that this move is necessary in order to discourage the trend of strategic defaults, there are others who say the decision by Fannie Mae has the potential of hurting the recovery of the real estate market. 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 real estate again. Locking out these potential home buyers could essentially reduce the demand for homes, which may affect real estate sales and eventually home values.

Can Fannie Mae’s strategy of trying to lock out strategic mortgage defaulters actually be an effective deterrent? It may not work unless other government sources of mortgage financing, such as, Freddie Mac and FHA adopt similar restrictive mortgage default policies.

Many homeowners already fear that adding a foreclosure to their credit report will preclude them from qualifying for a mortgage for at least two years, which may be a sufficient deterrent for borrowers who still have good credit.

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 real estate value could be somewhat discouraging. 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.

Author Bio: Written by R. Smith: Home Loans, Mortgage Quotes

Category: Real Estate
Keywords: mortgage, real estate