Credit union mortgage servicers face an expanded and more important role under a new Fannie Mae policy designed to crack down on borrowers who walk away from their mortgage commitments.
So called "strategic defaulting" has become a mini-trend around the nation as homeowners who can still meet their mortgage obligations conclude that there is no use in continuing to pay mortgages on houses now worth far less than the mortgage.
The consequences for walking away from a mortgage vary from state to state and often are not significant enough to forestall the practice, according to some experts in real estate law. But now borrowers who walk away from their mortgage commitments will face a full seven-year wait before they can be approved for a mortgage that can be sold to Fannie Mae, the mortgage giant said in its new policy.
Previously, the policy had been that people applying for a mortgage after a foreclosure had to wait five years and could have faced additional underwriting requirements.
But the new policy preserved allowing homeowners who had been through a foreclosure with extenuating circumstances, such as documented hardship from a job loss or other event, to face a waiting period of only three years. Fannie Mae stressed that the mortgage servicers from the failed mortgage would have to document those problems and extenuating circumstances and that the burden would be on the borrower to have that documentation for the new mortgage application.
"We're taking these steps to highlight the importance of working with your servicer," said Terence Edwards, Fannie Mae's executive vice president for credit portfolio management. "Walking away from a mortgage is bad for borrowers and bad for communities, and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time."
Fannie Mae said it would also "take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments."
And Fannie Mae said it would begin asking mortgage servicers, including credit unions, to "monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments."
This change could impact credit union mortgage operations in two ways. On the servicing side, it could bring additional documentation requirements and, on the origination side, it could put CUs in the middle between frustrated borrowers and their former mortgage servicers.
Elena Franz, a real estate lawyer with Pratt & Associates, a law firm based in Campbell, Calif., said any additional documentation requirements should be minimal since credit unions have already been documenting efforts to help homeowners resolve a mortgage dilemma and the policy change will not alter that. It's unclear, however, about changes on the origination side.
"The question of when someone walks away from a mortgage, in a lot of cases, is very subjective," Franz said. She also observed that many homeowners with troubled mortgages have had a great deal of trouble getting help from their mortgage servicers. "If someone makes a good faith effort to work with their servicer and never really gets a response from them, where does that fall?" she asked.
But Janis Smith, a spokeswoman for Fannie Mae, downplayed the change's impact. She stressed that the burden of documenting extenuating circumstances and hardships would remain with mortgage applicants where it always has been.
"The important thing about the new policy is that it emphasizes that people cannot just walk away with their commitments without consequences," she said.
Fannie Mae said the new policy will take effect Oct. 1 for manually underwritten loans and that a future release of Desktop Underwriter will include the new policy.