Fannie Mae is encouraging strategic default in an attempt to qualify more borrowers for future loans. One more example of moral hazard.
Irvine Home Address … 36 PARKCREST Irvine, CA 92620
Resale Home Price …… $915,000
I'm saddle sore
Four bits gets you time in the racks
I scream for more
Fools' gold out of their mines
I'm back in the saddle again
I'm back in the saddle again
I'm riding, I'm loading up my pistol
I'm riding, I really got a fistful
Aerosmith — Back in the Saddle
Everyone who loses their home in the deflation of the Great Housing Bubble will be counting the days until they are back in the saddle again riding their cash cows. Thanks to recent policy changes, those borrowers ready to play in the next Ponzi scheme won't have to wait too long.
Fannie Mae is changing its policy in a way that will encourage strategic default. The resulting walkaways will increase delinquency and foreclosure rates, lower home values, and cause billions of dollars in losses for the US taxpayer.
Kenneth R. Harney
Saturday, April 24, 2010
Here's some good news for people who had to give the deed on their house back to the bank because of financial problems, or who have done a short sale to avoid foreclosure [and those thinking about strategic default]: You may not have to wait the typical four or five years to re-qualify for financing to buy another home.
Instead, it could be as little as two years. In a bulletin to lenders April 14, mortgage giant Fannie Mae said it is relaxing rules that prevented loan applicants who have participated in short sales or deeds in lieu of foreclosure from obtaining a new mortgage for extended periods of time. The new rules are scheduled to take effect July 1.
Many borrowers are choosing not to strategically default because they know it would take five full years to get another home loan. Now that Fannie Mae (and probably soon Freddie Mac and FHA) has announced they will only make default cost two years, that is one less reason for underwater homeowners to tough things out.
Take careful note how this changes the equation for those considering strategic default. Here is what happens if they stopped paying today:
- They could save 12 to 36 months worth of housing payments with the amend-pretend-extend dance.
- After they go through the foreclosure, they could rent for a couple years at a cost less than the previous payment they quit making years ago.
- After three years of squatting and two years of inexpensive renting, they could buy a comparable substitute for their former home and pay less for it with money down.
- In the end, they would have the same house with a much smaller mortgage and plenty of equity.
Strategic default is a huge benefit to the underwater borrower because the waiting time to get back into the market has been substantially reduced. If they had to wait a full five years, they might be better served to wait it out and let the market come back to them — or so they might convince themselves. If they only have to wait two years, it isn't very likely they will miss a huge market rally, and the punishment for their bad borrower behavior fails to be the deterrent it was intended to be.
Do you get the sense that the people at Fannie Mae did not think this through? Did they forget why they had the five-year waiting period to begin with? Are they so desperate for new buyers to clean up their mess that they are willing to encourage much more strategic default? This seems really stupid to me.
Homeowners who have done short sales — such as under the Obama administration's new Home Affordable Foreclosure Alternatives program — will also be able to qualify for a mortgage in as little as two years. Although Fannie Mae officials declined to discuss the reasoning behind the changes, the bulletin to lenders said the company hopes to encourage troubled borrowers to work out solutions that avoid the heavy costs of foreclosure.
How is that supposed to work? That phrase suggests to me that Fannie Mae is well aware of the moral hazard they are creating and is doing it anyway. They are instituting a policy almost certain to increase strategic default, and they give lip service to efforts to prevent it.
Fannie's new standards come with some noteworthy fine print, however. To qualify for a new loan in the minimum two years, most borrowers will need to come up with down payments of at least 20 percent. If they can scrape together only 10 percent for a down payment, the wait will revert to the four-year minimum. And if their down payments are less than 10 percent, the wait could be even longer.
Well, if the borrowers planning to strategically default can squat for long enough to save a 20% down payment — something made much easier by not having any housing costs — then this requirement is not a barrier. I do like that they are encouraging saving.
On the other hand, if borrowers can demonstrate that their mortgage problems were directly attributable to "extenuating circumstances" — such as loss of employment, medical expenses or divorce — they might be able to qualify for new loans with minimum down payments of 10 percent in just two years.
They didn't wait long to add loopholes that everyone will jump through.
Freddie Mac, Fannie's rival in the conventional secondary mortgage market, has slightly different policies on mandatory waiting periods after short sales or deeds in lieu of foreclosure. For borrowers who cannot demonstrate that extenuating circumstances caused their financial problems, Freddie Mac will not approve new mortgages in less than four years. For people who lost their houses to foreclosure because of their financial mismanagement, Freddie's mandatory waiting period remains at five years.
On the other hand, when there are documented extenuating circumstances, the wait at Freddie Mac drops to two years after short sales or deeds in lieu and to three years after foreclosure.
In other words, the other GSEs will also be encouraging strategic default on a grand scale as each of them competes with the others (under the guiding hand of our government) to lower standards until borrowers can get 100% financing stated-income loans the day after a foreclosure or bankruptcy. Let's re-inflate the housing bubble.
Housing and consumer counseling advocates welcomed Fannie's relaxation of rules that had penalized borrowers who lost their houses after layoffs, illness and other unforeseen events.
"This is a positive move," said Marietta Rodriguez, director of homeownership and lending for NeighborWorks America, a national nonprofit network created by Congress to assist with homeowner financial counseling and community development.
"We all know that there are many people who through no fault of their own have to sell," she said, but they were blocked from buying a house again for four years or longer, even though they had rebuilt their credit, had qualifying incomes and were fully capable of handling a mortgage responsibly.
I would estimate one percent lost their house due no fault of their own. Those cases are sad, but it doesn't justify bailing out the other ninety-nine percent who are HELOC abusing squatters who gamed the system. Let's punish them as little as possible and see what happens in another ten years.
Also, did you notice this woman is a spokesperson for a government sponsored aid boondoggle. To me that demonstrates this is being coordinated by officials in the administration. They are telling this woman what to say to make the program sound like a good idea.
The main potential complication in Fannie's new approach, said Rodriguez, is in its credit-rehabilitation requirements. To qualify for a new mortgage, Fannie expects borrowers to reestablish their credit sufficiently to get passing grades from the company's automated underwriting system, which considers credit bureau data, among other factors.
Why don't they just change their underwriting system? This sounds like a problem any programmer could solve for them. They could streamline the process to always say "yes" just like the automated underwriting models of the housing bubble.
But according to Fannie's bulletin to lenders, it will not consider applicants with "nontraditional" credit or "thin files," where there is not enough history on file with the national credit bureaus to generate a risk score.
Rodriguez worries that many homeowners who have lost their houses during periods of high unemployment and stricter underwriting requirements by banks won't have sufficiently "traditional" credit histories — home-equity lines, revolving credit card accounts, personal loans and the like — to pass Fannie's test. After the years of recession, their main credit data may instead be their rent payment histories and telephone and utility bill payments, none of which show up in the national credit bureaus' files.
So the prudent who fail to use consumer credit, borrow for cars, or otherwise allow themselves to be slaves to lenders are punished by the GSEs. That is a great system. They only want to deal with people who have pledged their souls to their lending overlords.
Actually, I expect the credit history requirement to be relaxed. They need new borrowers. Besides, if people are forced to live without credit long enough, they come to realize what a trap it really is. If more people experienced the freedom of zero debt, lenders would make far less money.
Fannie Mae's revised standards may well provide an early second chance at homeownership for thousands of borrowers who assumed they would need to wait much longer than two years. But for those who don't have traditional credit profiles and sufficient down payments, that second chance is likely to be deferred.
If I read that closing properly, Fannie Mae is sending the message that it is acceptable to strategically default as long as former borrowers start saving and behaving well after the fact.
I appreciate messages of redemption. The indebted who rejected the idea of strategic default should reconsider their decision now that Fannie Mae has said it won't punish them for it. The crushing lender losses — which we as US taxpayers will be largely responsible for — should provide the full measure of pain lenders deserve for inflicting this madness upon us all. It may not all be financial for the lenders. Huge taxpayer losses will be the impetus for some truly punitive financial regulation. Lenders will get their comeuppance.
This one is really bad
Sometimes the HELOC abuse, gaming the system, and squatting is so egregious, so unbelievable, that even I am shocked.
The owners of today's featured property really hit the lottery. They bought at the very bottom of the market last time around, they HELOCed every penny out of the property right up to the very peak, then they stopped paying, and they have been squatting since 2008. They squeezed every available dollar out of this deal, and they are still squeezing today.
- Today's featured property was purchased on 8/20/1997 for $349,000. The owners used a $279,100 first mortgage and a $69,900 down payment — borrowers needed down payments back in 1997.
- On 1/3/2000 this couple began the new millenium by embarking on their own personal Ponzi scheme. They opened a HELOC for $150,000.
- On 4/8/2003 they enlarged their HELOC to $200,000.
- On 1/5/2004 they opened another HELOC for $353,500.
- On 4/22/2004 they got another HELOC for $145,000.
- On 2/25/2005 they refinanced their first mortgage for $661,000.
- On 2/23/2006 they obtained a HELOC for $344,000.
- On 9/18/2006 they obtained what appears to be a stand-alone second for $390,000.
- The total property debt is $1,051,000.
- Total mortgage equity withdrawal is $771,900.
- Total squatting is at least 18 months and counting.
Recording Date: 03/26/2010
Document Type: Notice of Sale
Recording Date: 12/21/2009
Document Type: Notice of Default
Recording Date: 06/25/2009
Document Type: Notice of Rescission
Recording Date: 04/20/2009
Document Type: Notice of Default
They are scheduled for auction on May 18, 2010, but if the postponements continue so the banks can dance some more, they will likely continue to squat in the house that already has provided them nearly three quarters of a million dollars in free money.
Think about what these people must believe about themselves and the things they are entitled to. In their minds, they are rich.
Whatever the owners may have done for a living, their house was providing them with a substantial additional living, and once the inflows were cut off, the outflows stopped. After six years of borrowing about $130,000 a year in tax-free income and 18 months of squatting, these owners are accustomed to a lifestyle that they will never have again. Unless, of course, we put them back into a house two years from now and inflate another housing bubble — which could happen.
Is this the kind of behavior we want to see more of? Should we really let this couple back into the housing market in two years? They weren't good examples of financial prudence last time around, and with as much as they were rewarded for this behavior, there is no reason to believe they would do anything differently next time.
Irvine Home Address … 36 PARKCREST Irvine, CA 92620
Resale Home Price … $915,000
Home Purchase Price … $349,000
Home Purchase Date …. 8/20/1997
Net Gain (Loss) ………. $511,100
Percent Change ………. 162.2%
Annual Appreciation … 7.7%
Cost of Ownership
$915,000 ………. Asking Price
$183,000 ………. 20% Down Conventional
5.16% …………… Mortgage Interest Rate
$732,000 ………. 30-Year Mortgage
$192,926 ………. Income Requirement
$4,001 ………. Monthly Mortgage Payment
$793 ………. Property Tax
$150 ………. Special Taxes and Levies (Mello Roos)
$76 ………. Homeowners Insurance
$170 ………. Homeowners Association Fees
$5,191 ………. Monthly Cash Outlays
-$985 ………. Tax Savings (% of Interest and Property Tax)
-$854 ………. Equity Hidden in Payment
$372 ………. Lost Income to Down Payment (net of taxes)
$114 ………. Maintenance and Replacement Reserves
$3,838 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$9,150 ………. Furnishing and Move In @1%
$9,150 ………. Closing Costs @1%
$7,320 ………… Interest Points @1% of Loan
$183,000 ………. Down Payment
$208,620 ………. Total Cash Costs
$58,800 ………… Emergency Cash Reserves
$267,420 ………. Total Savings Needed
Baths: 2 full 1 part baths
Home size: 3,000 sq ft
($305 / sq ft)
Lot Size: 4,927 sq ft
Year Built: 1997
Days on Market: 56
MLS Number: S607304
Property Type: Single Family, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This property is in backup or contingent offer status.
Fabulous opportunity in the guard gated community of Northwood Pointe. 4 spacious bedrooms plus extra large bonus room/office. Formal living room and dining room. Kitchen with double oven, cooking island and breakfast nook. Super sized family room with fireplace and built in entertainment center. Corner lot with great curb appeal. A short walk to award winning Canyonview Elementary and Northwood High. Enjoy community pool, parks and trails. Close to shopping, dining, entertainment, 5 fwy and toll roads.