Editor’s note: This story has been edited to clarify that Fannie Mae is extending the waiting period for borrowers who have been foreclosed on to apply for a new loan from five to seven years, unless they can show extenuating circumstances such as a job loss.

Fannie Mae says it will get tough on borrowers who engage in "strategic defaults," or walk away from a home that’s worth less than what’s owed on the mortgage even if they can afford to keep making their payments.

Economist Mark Zandi of Moody’s Analytics has estimated that 9 million homeowners are "underwater" by more than 20 percent, making them more likely to consider a strategic default.

Fannie Mae said Wednesday that it will not only refuse to guarantee another loan for seven years if it has evidence that a borrower chose to default on their loan, but will seek to recoup losses in court through deficiency judgements in states that allow lenders such recourse.

There’s a carrot-and-stick aspect to the new policy. Troubled borrowers who work with their servicer on foreclosure alternatives such as loan modifications, short sales, or deeds in lieu of foreclosure can be eligible for a new loan in two to three years if they can show extenuating circumstances such as job loss, illness or divorce.

"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," said Terence Edwards, Fannie Mae’s executive vice president for credit portfolio management, in a press release.

"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."

Under policy changes announced in April, borrowers may be eligible for a loan guaranteed by Fannie Mae within two years of a short sale or deed in lieu of foreclosure.

Those who can demonstrate extenuating circumstances such as a job loss will be required to make downpayments of at least 10 percent, and those who cannot must make 20 percent downpayments.

Fannie Mae, which previously required five years for borrowers who have been foreclosed on to reestablish credit, is extending the waiting period to seven years. Those who can demonstrate extenuating circumstances may qualify in as soon as three years after a foreclosure.

Next month, Fannie Mae says it will instruct its servicers to begin monitoring delinquent loans facing foreclosure and issuing recommendations for cases that warrant the pursuit of deficiency judgments.

While Fannie Mae won’t be able to obtain deficiency judgements against borrowers who default on their first loans in "non-recourse" lending states, in some of those states it might have recourse to seek deficiency judgements on refinance and home-equity loans.

In the 1930s, many states including California passed laws that barred lenders from suing homeowners who defaulted on their mortgages for losses above and beyond what lenders were able to recover when foreclosing on and reselling the borrower’s home.

California lawmakers are considering a bill that would extend some protection from deficiency judgments for borrowers who refinanced their mortgages (see story).

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription