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Walking away from a mortgage can now result in a 7 year penaly imposed by Fannie Mae.

In an effort to mitigate losses incurred from borrowers walking away from their mortgage because they owe more than the home value, Fannie Mae said that those who had the capacity to pay the mortgage or did not attempt a foreclosure alternative program would not be eligible for a mortgage for a 7 year period.

High loan to value mortgages and falling home values put many homeowners in a situation where they are “underwater”, owing far more than their home is worth. Walking away from the mortgage creates ethical as well as credit issues, but has become more of an acceptable choice, even with homeowners who can still afford to make their mortgage payments.

Fannie Mae, one of the biggest sources of home financing in the U.S., continues to face major losses from mortgage defaults and foreclosures. Their plan is to try and prevent more losses by threatening to lock out “strategic defaulters” from financing another home for 7 years after a foreclosure. Borrowers who can prove extenuating circumstances or attempts to prevent the foreclosure, such as a loan modification, may have the waiting period reduced to 3 years.

While some advocates claim this action is necessary to discourage the growth of strategic mortgage defaults, there are others who say the move by Fannie Mae has the potential of derailing the recovery of the housing market. Their argument is that strategic defaulters walk away from a mortgage because of negative equity, but they still have jobs and the required income to qualify for buying another home. Locking out these potential home buyers could essentially reduce the demand for homes, which affects sales and eventually home values.

Will Fannie Mae’s strategy of trying to lock out borrowers who strategically default on their mortgage really work? Not unless other home financing sources such as, Freddie Mac and FHA adopt similar mortgage default policies. Also, adding a foreclosure to a credit report typically precludes a borrower from qualifying for a mortgage for at least two years, which may be a sufficient deterrent for borrowers who still have good credit.

The motivation for a strategic mortgage default may depend on how deep a borrower is underwater on their home. Having a mortgage that’s twice as much as the value of a home could be somewhat discouraging. The prospect of being stuck with a losing investment that may not reach a break-even point for 10 years or more may be enough motivation to take a walk.

Written by R. Smith: Home Loan, Mortgage Quote, New Homes Chula Vista

You have probably heard all this talk about how buying a home in the process of foreclosure is such a good deal and the fabulous discounts that you can obtain on the market price. It is true that you can sometimes get good deals but in order to close one of them, you’ll need to be familiar with what happens at the different stages of foreclosure and the advantages and disadvantages of buying at each stage. There are petty of pitfalls to negotiate and you’ll need all the help you can get.

There are four different phases in the foreclosure process and we shall deal with them one by one.

Stage 1:  Missed payments

In many states, the borrower must fall 90 days behind on his mortgage payment before any lender can begin the process of foreclosure. This is the stage where they borrower has the maximum number of options to avoid actual foreclosure. The lender could also be keen to settle the matter before it gets any worse.

Advantages:

-a homeowner will be anxious to sell and will cooperate fully in trying to avoid foreclosure
-the homeowner may, with the co-operation of the lender, provide an attractive discount as well as other cost concessions.
-because the homeowner is not yet in desperate financial problem, the house is likely to be in better shape as regards essential repairs and maintenance
-there is plenty of time in which to carry out a proper inspection of the house

Disadvantages:

-the lender may not settle for a price that is less than the outstanding on the mortgage
-the home owner is still in possession of the house and you may need eviction proceedings to get rid of him

Stage 2: notice of default

When the borrower falls more than 90 days behind on his mortgage payment, the lender will issue a public notice noting the default and calling upon the borrower to make good the deficiency within 90 days failing which foreclosure proceedings will commence.

Advantages

-because the home owner is staring foreclosure in the face he would be under pressure to settle and it is possible that he may accept a price below market.
-there is plenty of time in which to carry out inspections and research the property thoroughly

Disadvantages

-unless the selling price covers the full amount of the mortgage and all costs, it would become a short sale and the approval of the lender is required.
-the home owner is still in possession of the house

Foreclosure auction:

If the homeowner fails to come up with the amount due within the time period stipulated in the notice of default, the property is put up for public auction.

Advantages

-because the lender is only interested in recovering the amount due to him it is possible to get a house at below market value.
-because of the substantial cash payment required, there would be less competition in buying the house

Disadvantages

-substantial cash payment is required on the auction date
-the buyer has to take the house in a “as is” condition
-the buyer will continue to be responsible for any liens or encumbrances on the house
-no inspection is usually allowed

REO properties (Real Estate Owned by lender)

If, for any reason, the property cannot be sold at a foreclosure auction, the bank or lender takes possession and these properties are called REO properties. These properties will normally be listed on the MLS and can be bought through a real estate agent.

Advantages:

-the bank would be keen on selling the property and therefore willing to negotiate reasonable terms on price and closing costs
-you will obtain clear title as REO properties will not have any liens or encumbrances in the form of other mortgages or back taxes
-the house would be vacant
-because the bank has listed the house on the MLS they will pay the real estate agent’s commission
Disadvantages:
-the sale would be on an “as is” basis and the bank would not take responsibility for any repairs
-there will usually be additional paperwork involved

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