By now, you've undoubtedly heard about the growing trend of walking away from homes with delinquent mortgages. Many who take this radical step have little or no equity in their home, as declining home values have made their mortgage balance higher than the home's market value.
Some walkaways put little down on the home to begin with, when mortgage rules were loose a couple of years ago. They may feel little financial commitment to the property or the mortgage.
To this point, this has not been seen with great regularity here in the Chicago area. But its incidence is increasing in the hardest-hit real estate markets - Las Vegas, and parts of Florida and California.
New guidelines by Fannie Mae and Freddie Mac, sent to lenders on March 31st, now impose long-term negative consequences to those who flee their homes and their mortgages, and whose homes subsequently fall into foreclosure. Such borrowers will be blocked from receiving a Fannie Mae or Freddie Mac-backed loan for five years. Even with "severe extenuating circumstances," new loans will be blocked for three subsequent years.
After the 5 years elapse, those who walked away from their previous homes will have to put at least 10% down on their new homes, and have a FICO Credit Score of at least 680 in order to qualify for a new loan.
In addition, Freddie Mac reminds borrowers that foreclosures remain on an individual's credit record for seven years. They also plan to pursue walkaways to the fullest extent of state law, and pursue deficiency judgements on unpaid loan amounts.
Over the past few months, many websites have popped up promising "Walkaway Counseling," for a fee of up to $1,000. Following the direction provided by these sites will not protect a delinquent borrower from further action by the lender, however.
Most lenders are usually amenable to negotiated forbearance agreements with delinquent borrowers. Often times, lenders will extend the deadline for payment, or add missed payments to the end of the loan.
Those delinquent may elect as well to sell short, and pay the lender, under certain circumstances, less than the amount owed on the loan when a property sells. New federal legislation usually makes any forgiven debt under a short sale not subject to tax.
Homeowners who simply walk away from their homes, and their mortgages, will be liable for Income Tax on the full, unpaid mortgage balance - as this debt was not forgiven by the lender. To add insult to injury, a foreclosure action will make it difficult, if not impossible, for a borrower to obtain personal lines of credit, new credit cards, or auto loans.
Please see our Sunday post @ BlogChicagoHomes.com for more, as well as a link to Kenneth R. Harney's article in yesterday's Chicago Tribune.
DEAN & DEAN'S TEAM CHICAGO
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