Posted on 04/14/2008 7:56:05 AM PDT by SmithL
The country's two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing "walkaway" trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain.
On March 31, Fannie Mae sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition is for three years.
Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680.
Freddie Mac, Fannie's rival, counts foreclosures as major credit blots for seven years, and a senior official said the company is now aggressively pursuing some walkaway borrowers "to preserve our deficiency rights" where permitted under state law.
The walkaway trend is particularly noteworthy in former housing boom markets - including California, Florida and Nevada - where many homeowners find themselves upside down on their loans, owing tens of thousands more than the current market value of their houses. If they invested little or nothing in down payments, some owners reason, continuing to make payments - even if they can afford to - may be throwing good money after bad.
A number of Web sites have popped up claiming to cut the hassles of bailing out of a mortgage. One company promises that clients "will be able to live in (the) home for up to eight months
... Fair Isaac Corp. of Minneapolis, developer of the FICO scores used in most mortgage transactions, is unhappy at any suggestion that a foreclosure could be minimized or wiped away
(Excerpt) Read more at sfgate.com ...
It’s about time!
IOW ... “Don’t you dare try and walk away from your obligations or we will begin to use common sense!”
I always thought that someone who had a house forclose on them would not be able to get another mortage for several years. I guess I was wrong.
We know of one case where the former owner of the house has been living in it for 15 months since the foreclosurer notice. Paying no mortgage payment or taxes. Just keeping the lights and water and cable on. The bank has made no move to evict them.
While congress is talking about easing the crisis..all the institutions are having to tighten the rules..down payments,credit etc. So this will drag out the recovery.
Not bad, but just a comment.
[paraphrasing above quote] "Even after 5 years, borrowers will still need 10% down and a 680 FICO.. "
Huh? Doesn't that mean that with better credit and no jingle-mail history, a borrower might show up with...what, 3% down? Slow learners, this mortgage banker bunch. What ever happened to 20% down? An obsolete concept, I take it.
A few thoughts...
1) They have not taken repo since that puts it back in their court and they don’t want to claim a write down
2) Can’t sell it in a down market so better to wait a while longer
3) Have their heads up their asses?
we had a walkaway in my neighborhood. I should call it “flyaway” because they returned to Singapore or Indonesia in January and left a house filled with furniture and one car on the lawn.
I don’t know the status of the house but it won’t help us sell ours since my wife was transferred and we have to sell.
“Yeah but their stubbornness in not restructuring debts is a problem as well. As a business owner I have worked out better terms as a debtor and a creditor. Better to get revenue than a write off and much more honorable to try and work something out than default.”
You’re right, it’s definitely a problem, but the “solution” of “doing nothing” is ten times better for the lenders at this juncture. And you’re right, it’s better to achieve a resolution BUT NOT for the lenders....if you were or are a small (or large) biz owner, you didn’t face this particular morass with the same options at your disposal as the banks have. Especially if you didn’t have stock (equity) to sell or to short or to cut in half in order to thank your shareholders for their support.
Lenders are facing a major piece of criticality here, namely, should they be forced to take these impaired assets back onto their balance sheets, their reserve requirements will rise dramatically. That means they would have to raise huge capital, and some might not be able to do so. They would be under Fed seizure/supervision immediately. The World Bank is demanding that this action be taken, and of course the banksters are resisting with every ounce their Congressional bribery skills. It is MASSIVELY less expensive to pay off Congresspeople than to actually raise reserve req’ments, esp when you can borrow the bribes and the reserves you’d need have to be RESERVES: They just sit there and canot be loaned out.
So it is advatageous for the banks to just let this thing sit as is, with non-paying borrowers in homes, with debts and arrearages relentlessly piling up, in the hopes that Congress will write some law, some act, change some tax treatment that they can exploit.
So they're admitting that they are still making loans of < 10% down to people with higher FICO scores and no foreclosures on their record ?
In an economy that is currently dropping > 9% a year in RE values, do they think making loans where the year following origination the borrower will be underwater is a good idea ? This is a good look at "moral hazard" on an institutional level, and why the lenders need to be allowed to fail.
Also it’s a bunch of malarky when the MSM whines and moans about what a “personal tragedy” it is when someone loses their home.
Sometimes it is. But in this bust, many are walking away from their mortgages even BEFORE they reset. They are making a calculated decision that, whether it’s “good money after bad” or whatever, it is to THEIR BENEFIT to give the house back to the bank. They voluntarily take on whatever consequences.
So in many cases it is a business transaction, pure and simple, not a “personal tragedy.”
with government-subsidized mortgage insurance, the lenders don’t really care if the borrower walks away.
Sounds like a great opportunity to re-decorate your new house.
“Don’t you dare try and walk away from your obligations or we will begin to use common sense!”
Agreed!
I don't understand. I am not an expert so help me out here. If they have a loan out to a borrower, they need reserves of around 10% (just a guess) to cover it. But, if they get the house back (if the owner walks away), wouldn't it then turn into an asset that wouldn't have to be backed by a reserve?
“should they be forced to take these impaired assets back onto their balance sheets, their reserve requirements will rise dramatically.
I don’t understand. I am not an expert so help me out here. If they have a loan out to a borrower, they need reserves of around 10% (just a guess) to cover it. But, if they get the house back (if the owner walks away), wouldn’t it then turn into an asset that wouldn’t have to be backed by a reserve?
There are a lot of variations in the ways this could work. ALL of them are negative to a bank. The single exception of a clean, quick foreclosure in a rising RE market is the least painful but is still a loss.
Also, you’re probably confusing a couple of elements. By “reserves” I mean the amount of “MZM” money of zero maturity = cash and fungible-at-face T-bills the bank has on hand to meet withdrawals and day-to-day ops.
First, most banks do NOT keep these assets on their balance sheets. The practice has been to 1: originate the loan (generating fees of say $3K to $20K) 2: Package either the complete loan into a “bundle” or package the loan less the servicing rights (the responsibility of collecting and forwarding to the FUNDER an individual loans’ pmts, KEEPING the late charges, making sure the taxes & fire ins are paid, etc etc) which is typically compensated by 1/4 of 1% of the loan amount. When times were good, the originating bank made the 4 or 5-figure orig fees and picked up the servicing rights, which are non-trivial, but if you have a few dedicated folks doing it on many loans, with an efficicent computer system, it’s a modestly profitable part of your book of business. Originating the loans was where the fat money came from. Because, once the loan had been sold, the bank made several grand just for exercising its credit lines for a few days.
All is great until the SHTF. Most of the packaging agreements allowing the originating bank to package & sell these loans into tranches either to Fannie or to institutional investors has a “takeback” feature, meaning that if the loan defaults within the first year, the originator has to take it back.
This is what happened to the Ownits and the New Century Financials which literally imploded in days starting late 2006. Imagine, just on one loan, you, the lender starts off being $8K ahead. Borrower #2471 stops paying his mort in month 3. Month goes by. Another month goes by, you write angry letter. Another month goes by, you file NOD Notice of Default. MEANWHILE you have had to make mort pmts (x 4) to the trancheholder you sold the loan to. Meanwhile, the property has declined by 20%. Maybe more if the borrower has ripped out the pipes. House goes to fork auction, nobody bids. Suddenly, you, the originator are the owner of a house worth 20% (if you’re lucky) less than the mort amount and you have a running sore instead of a quick $8K cash. Now, you’ve paid out the $8K in mort pmts, and assuming the house was $300K, you own it for $300K but it’s only worth $240K and maybe $220K; point being IT’S STILL THERE, AND IT’S YOURS, whatever it’s worth. Your balance sheet has swung $75K negative. But that originator/servicer damn well better keep making those mort pmts to the underlying FUNDER because its credit lines will be cut off if they do not. Now, take a cheesy little suburban shopping center mort originator with $500K in the bank and heavy BMW payments and ONE or TWO of these loans is an issue. A dozen of these loans and the strip mall has a new vacancy, instantly.
In the case of a bank who got stuck with these types of situations, they obviously do not happen one at a time. Enough of those $75K and $100K swings in balance sheet assets and the Feds come in and effectively seize the bank. Somewhat less good is only to have loads of these impaired assets on your books and be unable to make any new loans.
Now I realize that the very short answer to your original question is: REO properties may well be an asset, but they sure as shinola will NOT count as bank reserves, LOL.
Depends on the program.
Some HUD, “urban homstead” and other frauds are very high.
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