Fannie Mae to Hold Foreclosed Borrowers More Accountable

Source: American Banker, Kate Berry (April 22, 2008)

At the end of the month, Fannie Mae will adopt higher minimum down payments and credit scores for borrowers with a past foreclosure.

The government-sponsored enterprise already has boosted the time period for these borrowers to re-establish their credit to five years from four years.

While exceptions could be made for borrowers in hardship situations, Marianne Sullivan, senior vice president of single-family credit policy and risk management at Fannie Mae, says those who had the ability to pay but walked away from their homes should be treated differently than those who met their payment obligations.

Additionally, Sullivan says Fannie Mae will make it more difficult for borrowers to transform their current residences into rentals and purchase new homes to discourage them from walking away from the existing home after the transaction closes.

Fannie Mae is making these changes as Congress considers passing legislation that would allow struggling borrowers to refinance into FHA loans after their lenders write down a portion of their mortgages, and the mortgage industry is pushing for speculators to be barred from the program.

Former Mortgage Bankers Association chair Regina Lowrie asks, "Why should a servicer take a haircut or have a cram-down for any borrower that truly has the ability to pay?"

[Photo Courtesy of PLAN.9| flickr]

The news -- I'm almost ashamed to call it that -- emanating from Fannie Mae is designed to scare off foreclosure speculators who are entertaining the thought of walking away from their mortgages. The message, however, should be clear that the government means business, and this announcement signals an end to any possible doubts that there will be more bailouts to come for financially-strapped borrowers.

To extend the mortgage moratorium from four years to five years seems like a small setback for prospective borrowers with a past foreclosure. To be sure, there will already be a stigma placed on these "risky" borrowers, but the five-year window will seem like an eternity to re-enter the homeownership arena.

By that time, hopefully, they can see changes in their credit score -- sans the foreclosure remark, or course -- and move on with their mortgage goals. The burden, then, will be for the prospective borrower to show and prove that they deserve a second chance at a mortgage.

A lot can happen in five years: perhaps a new 49ers stadium in San Francisco, gas prices should easily top $5.00 per gallon, but hopefully the real estate market will be back on the up tick.

Can we tighten up the purse strings and position ourselves to get back in the mortgage game, foreclosure people?

For everyone in the industry's sake, I sure hope so.