Fannie to Deny New Mortgages to Strategic Defaulters for Seven Years

Fannie Mae said it won't back new mortgage loans for seven years for homeowners who walk away from their mortgages although they were able to pay or did not seek a workout in good faith with their lender.

Borrowers who have extenuating circumstances may be eligible for a new loan in as little as two years, the mortgage giant added.

"We're taking these steps to highlight the importance of working with your servicer," said Terence Edwards, executive vice president for credit portfolio management. "Walking away from a mortgage is bad for borrowers and bad for communities."

Fannie Mae said it also will sue borrowers who strategically default on their loans to recoup the outstanding mortgage debt in jurisdictions that allow for deficiency judgments.

Strategic defaults are becoming more common, various studies show -- a Morgan Stanley report pegged them at 12% of all home-mortgage defaults in February, up from "insignificant levels" three years ago. Lenders fear borrowers who "walk away" will greatly increase the industry's foreclosure-related losses, which already total in the hundreds of billions of dollars.

In addition, growing social acceptance of this behavior could have ramifications not only for personal credit histories and the health of neighborhoods, but also for the future of mortgage lending, according to those studying the issue.

One possible reason the numbers are rising is some homeowners' belief that lenders aren't aggressively pursuing those who default, according to a report by the Chicago Booth/Kellogg School Financial Trust Index.

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