Posts Tagged ‘deed in lieu’

Fannie Mae Fall Out

In a New York Times article today, lending experts sounded off concerns about Fannie Mae’s new hard line approach toward strategic defaulters.

For one, the experts say, in a time where the banks, including Fannie and Freddie, received big taxpayer bailouts, it is going to be hard to convince borrowers that they should end up stuck with the tab. For another, they wonder how Fannie intends to weed out those who strategically default from those with financial troubles.

The experts were also puzzled about just what Fannie intends to accomplish. Fannie spokespeople have said that they want to force people to work with their servicers on alternatives to foreclosure such as lender approved short sales and deeds in lieu. However, as I have pointed out  in yesterday’s post on the subject,  lenders and servicers have proven completely unwilling to work with borrowers on so called “foreclosure alternatives.”

Furthermore, this policy does nothing to address the negative equity problem, known colloquially as being “underwater,” where a borrower owes more on his home than it is worth. As the article points out:

About a quarter of homeowners with mortgages, or about 11 million households, owe more than their home is worth, and are potentially vulnerable to a strategic default. A flat or rising real estate market could encourage many of them to hold on; a declining market would suggest it was time to go.

While negative equity by itself does not cause foreclosures, it does encourage them in a down market. There are many reasons why someone, who isn’t having trouble paying his or her mortgage, may choose to walk away. One of them is because he or she has done the math and it doesn’t make sense to continue to “throw good money after bad.” Another could be that he or she needs to move because of changes in employment or other issues, and can’t sell the house because of how much he or she owes.

Whatever the reason, businesses make such choices all the time. Why is Fannie Mae trying to punish people for engaging in rational economic decision making? The answer is that neither Fannie nor any other large lender out there wants to come to grips with the reality that all they’re holding on to is worthless paper.

Should You Walk Away From Your Mortgage?

underwater mortgages This is a question that many homeowners are facing today as mortgage delinquencies rise and as many people find themselves saddled with homes that are worth less than the mortgage note. Even people who can afford their mortgage payment are considering giving up their home because of negative equity.


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