HOUSING: Fannie Mae cracking down on 'walk aways'
New guidelines make it more difficult to purchase a second home.
By ZACH FOX - Staff Writer | ∞
One of the nation's largest lenders is cracking down on borrowers who let their homes enter foreclosure ---- a phenomenon that has spawned several North County businesses catering to homeowners who want to "walk away."
Fannie Mae, a government-chartered lender, instituted guidelines June 25 that limit the loans a homeonwer can secure when purchasing a second home. As home prices plummet in San Diego County, local real estate agents say more homeowners are looking to purchase similar homes for hundreds of thousands less and then let their original home fall into foreclosure.
"It's the duck and weave," said Christopher Thornberg, an economist with Beacon Economics. "You're looking at (a similar house) down the block listed at half of what you bought (your house) for, so obviously the best move financially is to move from your house to that one."
Purchasing a new home knowing that the primary residence will fall into foreclosure raises legal and ethical questions, real estate agents said.
It is a federal crime to lie on a mortgage application with a federally insured lender, such as Fannie Mae.
Fannie Mae's new guidelines require borrowers looking to purchase a second home to have at least 30 percent equity in the original residence, or plenty of cash reserves.
Some mortgage brokers are concerned that the new policies will further strangle a lagging market where home prices have tumbled 28 percent from a November 2005 peak, according to Standard & Poor's Case-Shiller Home Price Index.
"It's definitely tightening the market because these same people pretty much need to come up with 20 percent down," said Dave Hopkins, a mortgage broker with Rancho Financial, a brokerage firm in Rancho Bernardo. "And then, if they don't have another $20,000 laying around, they're just knocked out of the picture, so it's definitely slowing a lot of really qualified buyers from coming into the market."
Though no definitive statistics are kept on "walk aways," or borrowers who allow their homes to fall into foreclosure, local real estate agents say an increasing number of their clients are asking about buying another home for cheap with no intention of keeping the first home.
Agents said the homeowners typically do not intend for the first home to enter foreclosure, but instead hope to short sell the home, or sell it for less than the balance on the mortgage with the bank's approval.
If the home cannot sell, it will then fall into foreclosure.
Jon Maddux, founder of You Walk Away, a Carlsbad company that advises families facing foreclosure, said that 10 to 15 percent of his clients have asked about buying another property before their home enters foreclosure.
"Is it against the law? I don't know. But is it ethical? It's pretty clear that it's not," Maddux said. "We never advise them to do it. ... What we're telling people is look, if you're considering buying right now, it's not necessarily wise to buy a depreciating asset."
Though real estate agents and mortgage brokers said the new policies are directed at walk aways, Fannie Mae issued a statement Tuesday that the guidelines were not in response to borrowers allowing their homes to fall into foreclosure.
"In our experience, most borrowers are acting in good faith to try to keep their home," the release stated.
Beyond the new requirements for borrowers purchasing second homes, the new guidelines also require homeowners who have received a notice of default ---- the first step of the foreclosure process ---- to wait two years before qualifying for another mortgage. It also extends the time homeowners with a foreclosure must wait before qualifying for a Fannie Mae mortgage. The policies can be viewed here.
Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com.
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SYriousK wrote on Jul 16, 2008 4:33 PM:"Walk aways" unethical? I don't think so - that's common financial sense. It's the lenders who set up the rules! ...and the house I just walked away from - is it worth less now in a down market to the next buyer? In an up market who is really getting screwed when a house originally cost x amount of dollars to build?
Linda wrote on Jul 17, 2008 5:57 AM:Of course it's unethical! The bank agreed to loan you the money and you agreed to repay it. If you walk-away, leaving the bank holding the financial bag on a house that is worth less than what you borrowed, it's unethical. Why should the bank be screwed because you bought a house w/o equity?
Many states have what's called a "deficiency judgement" in a foreclosure that a lot of people are unaware of. You may walk away from a house, but the financial lost the bank takes follows you! We're looking at a generation who won't ever be able to buy a house!
Bill wrote on Aug 7, 2008 9:06 AM:I think when faced with a situation where you owe significantly more than the house is worth, it makes smart financial sense to walk away. is the lender going to help you out when you retire because you kept throwing good money at a bad debt? I doubt it. look out for #1.
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