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Fannie’s lockout policy for strategic defaulters

By Holden Lewis ·
Thursday, June 24, 2010
Posted: 11 am ET

Fannie Mae says it won't let you get a Fannie-backed mortgage for seven years if you strategically default. I doubt this policy will prevent many strategic defaults. (A strategic default happens when you can afford your mortgage payments, but you stop paying and let the house go in foreclosure.)

I doubt the effectiveness of this policy because it merely adds two years to the time that defaulters will have to rent. Until now, Fannie's lockout period was five years -- in other words, if you went into foreclosure, you had to wait five years to get another Fannie-backed loan. So now people will have to rent for seven years instead of five. Big whoop.

Fannie's lockout period used to be four years. When Fannie increased that to five years in 2008, did it prevent many foreclosures? I doubt it. So now the lockout period has gone from four years to five years to seven years.

Freddie Mac's lockout period is five years. I wouldn't be surprised if Freddie matched Fannie. The FHA's lockout period is three years. Unless that policy is changed, you could default on your Fannie-backed mortgage and get an FHA-insured home loan three years later.

Now I have to clarify something I said in the second paragraph. I said the policy "merely adds two years" of renting. That's in comparison with the old policy and its five-year lockout period for all foreclosures. Now Fannie says it'll give you a loan three or even two years after foreclosure -- as long as you tried to work things out with the servicer and you have extenuating circumstances.

Old policy: You're locked out of a loan for five years after foreclosure, regardless of circumstances.

New policy: If you walk away from a mortgage that you could afford, you're locked out of another loan for seven years. If you tried to modify the mortgage, you're locked out for three years. If you worked with the servicer but lost the house because you were laid off from your job, then you might be locked out for only two years.

Fannie also says it will sue strategic defaulters to recover the unpaid balances in lawsuits called deficiency judgments. This policy might prevent some foreclosures, because it could increase the expense of defaulting. Still, homeowners are going to weigh the costs and benefits of walking away, and some will decide it's cheaper in the long run to walk away.

Some states allow deficiency judgments, and some states don't. Some states ban deficiency judgments on purchase loans, but allow the lawsuits on refinanced loans. If you have a reliable list of which state allows what, please pass it along.

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