Your credit score will be burned if you foreclose, and now Fannie Mae is threatening to compound the problem by “locking out” strategic defaulters for a period of seven years.
In a plan announced at the end of June, Fannie Mae said that people who foreclose when they can afford to make payments (“strategic defaulters”) will be ineligible for home loans for seven years after the foreclosure.
Like typical government policies, this plan is not thought through. It will hurt the economy. It will not work. And it is simply untrue.
Fannie Mae’s lockout will hurt the economy.
Approximately 2.5 million homeowners are expected to go through foreclosure this year alone, not to mention the millions more who have lost their homes since the recession began. Our economy is hungry for homeowners. If we want our economy to recover, strategic defaulters must have the ability reenter the market as soon as possible.
By definition, strategic defaulters are able to afford home loans. So lend them money. Give them interest rates based on their bad credit score. Charge them fines. But do not--do not--refuse to lend to people who can afford it simply to teach them a lesson. A person’s poor credit score, which comes with missed opportunities and high interest rates, is a big enough lesson.
Fannie Mae’s lockout will not work.
For strategic defaulters, the numbers do the talking. Many of my credit clients are underwater by as much as 75 percent. Fannie Mae is giving these people a choice: They can either wait for their equity to return, or they can face a seven-year lockout as renters. Most will choose the latter as they will be unwilling to wait for their equity to return, which could easily take seven years anyway, and only if the market recovers.
In short, Fannie Mae’s announcement will not keep financially troubled individuals in their homes longer, but it might scare them from reentering the market and helping the economy grow. They are going to think they cannot buy a home, so they will not try. And this is bad news for the economy.
Fannie Mae’s lockout is a bluff.
The government wants to see the economy recover, and with Fannie Mae in the pocket of every politician, its stringent policy will be short-lived. If a person has a sizeable down payment and a reestablished credit score, and that person can afford a home that reduces his monthly payments, why would Fannie Mae stop this buyer from reentering the market and taking an empty home off its hands?
The truth is that Fannie Mae will not enact this proposed seven-year lockout. Indeed, Fannie Mae has already stipulated that it would lower the lockout period for people with “extenuating circumstances.” And even as it issues its lockout threat, Fannie Mae is relaxing its existing guidelines that call for a five-year lockout.
Mark my words: Fannie Mae is just yammering on, and will loosen its guidelines in due time. After all, a robust housing recovery requires all buyers are needed, not just ones with a great credit score.
Moreover, the government-owned enterprise is failing to tell homeowners one important fact: Fannie Mae is not the only lender in town, and buyers have plenty of other avenues to homeownership. For instance, a person who went through a foreclosure yesterday can buy a home today using owner financing.
Fannie Mae is just a playground bully who is simply trying to scare troubled homeowners with its lockout bluff.
Philip Tirone is the founder of the Mortgage Equity Group (The MEG) and an expert in residential home financing. Tirone transitioned into the credit industry after watching his clients struggle to obtain loans due to hardships caused by the credit-scoring systems. Leveraging years of experience in difficult-to-obtain loans for clients with stated incomes and/or poor credit scores and studying tens of thousands of credit reports to identify patterns of change, Tirone became an expert in the world of credit-scoring. He authored the 7 Steps to a 720 Credit Score products.