photo credit: The-Lane-Team

REALTOR® magazine reports that Fannie Mae is going after homeowners who choose “strategic defaults”.  A strategic default is one in which the homeowner is able to pay but decides not to.  Usually this is due to them being “underwater” (the value of the home dropped below the amount of the mortgage).  In some cases the owner decides to just walk away and let the bank have it back.

Homeowners who choose such a move will be ineligible for a Fannie Mae backed loan for the following 7 years.  The fact that Fannie Mae backs about 75% of the loans originated means that you could be blocked from buying if you walk away from your home just because its value dropped.

Furthermore, in states they are allowed, Fannie Mae is going to seek deficiency judgments against homeowners who walk away.  I read a recent blog about a REALTOR’s® client who did a strategic default and ended up having to rent a house in the same neighborhood for more than their house payment was in the beginning.

If you are one of the thousands of people underwater in your home, think twice before you decide to walk away.  It may not be as simple a decision as you believe.

photo credit: fPat

Some lenders are starting to write down the principal for some homeowners in trouble, according to a story in this weeks edition of Business Week.  Mortgage work-out solutions in the past have just addressed the interest side of loans, giving very little to homeowners who now owe significantly more than the present market value of their home.

Banks can either forgive part of the principal or merely defer it.  If principal is deferred, the homeowner must pay back the full amount of the loan when he sells the house.  If the house doesn’t sell for enough to cover the balance, the homeowner has to pay the difference.  Such a solution may just push the problem down the road for many people.

It is still rare for banks to forgive or defer principal.  But in the 3rd quarter of 2009, 3% of the total mortgages that were modified included principal modification–either reduction or deferral.

The writers of this article didn’t mention the effect of mortgage write-downs on the homeowner’s credit.  It is likely such a new concept that the rules of the game have yet to be established.  I will venture a guess, however, that the effect will be similar to that of a short-sale: that is, it will not be the train wreck that foreclosure can be.  But it will have a significant impact on the credit score.

photo credit: alan.stoddard

The Kansas City Star recently reported about Kyna Franklin who received help saving her home from foreclosure.  (See full story here.)  The details aren’t specific, but part of this foreclosure appears to have involved a request for a loan modification.  The Obama administration instituted a program to encourage lenders to modify loans–usually by lowering interest–in an attempt to curb the growing foreclosure problem.

But some lenders have used this program as a way to “steal”  homes that have a good deal of equity.  Here’s the scenario that happened to a friend of mine:

He was current on his payments with a good credit score and about $20K in equity, but he is self-employed and his income has dropped.  He contacted the lender and asked to do a loan modification.  He was told that mortgage payments couldn’t be received by them while his request was being processed.  He made his payment anyway, but the lender returned it.  At the end of the month, he received a call from a friend who buys foreclosures at auction.  His house is being sold at auction by the lender, who has foreclosed on his home.

Unfortunately, he found that he is not alone.  This lender did the same thing to many others in Missouri.  The attorney general is looking into it, and pressing charges.  But in the meantime, I had to help my friend move out of his house into a rental.  His credit dropped over 100 points, and he’s left wondering how something like this could have happened.

My friend’s story may not be the norm.  There may be lenders out there who aren’t preditory.  But it gives me pause.  I think that anyone thinking about asking for a loan modification should do some research about the process before jumping into waters that may be teeming with sharks.