By: Lance T. Denha, Esq.
Government-sponsored mortgage purchaser, Fannie Mae (Federal National Mortgage Association “FNMA”), is encouraging certain distressed homeowners to find other alternatives to foreclosure. What is the price to the homeowner? A seven (7) year ban on any new loan! Troubled borrowers who do not attempt good faith efforts to work out a resolution, but have the capacity to pay, are targeted by this new FNMA policy.
FNMA has repeatedly stated that walking away from a mortgage is bad for borrowers and bad for communities and FNMA’s approach is meant to deter the disturbing trend toward strategic defaults. A “strategic default” occurs when a homeowner stops making payments on a mortgage despite having the financial wherewithal to do so. It has become increasingly common in communities where housing values fell sharply and homeowners are “underwater,” or owe more than their houses are worth.
FNMA has also stated that in locations where the law allows, it plans to take legal action to recoup outstanding mortgage debt from borrowers who strategically default. Michigan is one of the locations FNMA is targeting. Why? Michigan is what is known as a deficiency state that permits lenders and holders of a note to pursue any shortage amount owed to financial institutions as a result of a foreclosure. FNMA plans to instruct its servicers to monitor delinquent loans facing foreclosure and recommend cases to pursue for such deficiency judgments.
Fellow government-backed mortgage buyer Freddie Mac said its current policy requires at least a five (5) year wait. Freddie Mac will take a close look at the new FNMA policy, and will consider it in light of current market conditions in order to manage Freddie Mac’s risk as effectively as possible.
Fannie and Freddie were created by Congress to buy mortgages from lenders and package them into bonds that are resold to investors. Together, they own or guarantee almost 31 million home loans worth about $5.5 trillion. That’s about half of all mortgages. The wave of foreclosures affecting Fannie and Freddie loans has caused a major problem for the U.S. government, which effectively guarantees the loans.
If you can no longer make your mortgage payments and your home is now worth less than you owe on it, pursuing a short sale in order to take a small loss (or no loss at all) may be your best option in order to avoid the potential wrath of FNMA. The beauty of short sales is that they can be a win-win-win situation for seller, buyer and lender. Here’s how:
- The seller gets out of the mortgage liability without facing bankruptcy.
- The buyer gets the home at a reduced price.
- The lender agrees to a loss it considers minimal without going through a foreclosure and being saddled with an unsalable property.
The best way to improve one’s chances is to work with short sale team of experts which should include an agent and attorney. The agent will have access to a wider pool of potential buyers and more resources to market the home efficiently. The attorney will have the negotiating skills necessary to ensure that the deal closes prior to the home reverting back to the financial institution or third party buyer as a result of a foreclosure bid at a sheriff’s sale. In addition, an attorney has the ability to negotiate any deficiency balance as a result of the short sale taking place.
In announcing the new policy, FNMA has said homeowners who make a good faith effort to resolve their situation with their mortgage companies, and those who have extenuating circumstances, will be eligible for new loans in a shorter time period. The company did not detail how long the wait might be.
Lance T. Denha, of Denha & Associates, PLLC, works in the areas of business transactional law, foreclosure/pre-foreclosure workouts and bankruptcy law. In the business area, he specializes in general corporate law with a concentration in business and commercial transactions, property tax appeals, health care, and liquor licensing matters. In the foreclosure/pre-foreclosure workouts legal arena, Mr. Denha represents borrowers against lenders in seeking out residential loan workouts for purposes of avoiding foreclosure, or in the alternative, Mr. Denha will represent borrowers in foreclosure defense cases against lenders. Lastly, in the bankruptcy area, Mr. Denha’s focus is on bankruptcy law matters, specializing in debtor representation, creditor relations, and related litigation.
Mr. Denha is a member of the State Bar of Michigan and State Bar of Florida where he is licensed to practice law in Michigan and Florida.