Posted by Paul Francis on Wednesday, July 28th, 2010 at 7:12am.
Las Vegas Home Owners who Strategically Default about to see Stiff Penalties
Fannie Mae, the largest Guarantor of Home Loans in the Country, recently announced some new changes for homeowners eligibility to receive a home loan beginning on 10/01/2010 that you can read here:
Fannie Mae Increases Penalties for Homeowners who Walk Away
WASHINGTON, DC — Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.
“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 and our approach is meant to deter the disturbing trend toward strategic defaulting. 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.”
Currently… Las Vegas Strategic Defaulters could receive a New Fannie Mae backed loan within Five years if they met guidelines such as putting 20% down and having a stellar FICO score.
See Current Guidelines for Las Vegas Homeowners
It’s estimated that Fannie Mae currently buys up about 40% of all home loans meaning that servicers originating loans for strategic defaulters who walked away from their home within the past 7 years will not be Fannie Mae eligible. Basically…with current circumstances in the real estate lending market, they are not going to originate loans that are not Fannie Mae eligible.
FHA and Freddie Mac Expected to Follow Along
According to USA Today… a new proposed bill has passed the House of Representatives and is on it’s way to the U.S. Sentate that will make ANYBODY who has strategically defaulted from being able to receive an FHA Loan. (Low to no down payment backed by the Federal Housing Administration.) The Federal Housing Administration is currently insuring about 30% of all loans. (40% Fannie Mae + 30% FHA = 70% of all loans.)
A representative from Freddie Mac states that they are looking at the new Fannie Mae Guidelines:
“A spokesman for fellow government-backed mortgage buyer Freddie Mac said its current policy requires at least a five-year wait.
Freddie Mac will “take a close look” at the new Fannie policy, said spokesman Brad German. “We’ll consider it in light of current market conditions in order to manage our risk as effectively as possible.”
According to estimates, Freddie Mac guarantees 20% of all new home loans originated.
(Fannie Mae 40% + FHA 30% + Freddie Mac 20% = 90%)
Fannie Mae Plans to File Deficiency Judgments
This is where it gets tough for Las Vegas Home Owners who Strategically Default:
“Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.”
In Nevada… for home owners who purchased and signed Loan documents prior to 10/01/2009, the amount of time that a lender has to pursue a Deficiency Judgement is Six Months for a Foreclosure (Secondary Loans have Six Years) and to Pursue a Deficiency Judgement on a Short Sale or Pre-Foreclosure Sale = 6 years unless the lenders waive their rights in writing. (I have no idea what Nevada Legislator came up with this terrible law but I would bet that some financial institution was contributing heavily to their “campaign” fund.)
(Always Consult Legal Counsel for exact rights specific to your situation.)
I do know of situations where Las Vegas Homeowners have been advised to just walk away by an Attorney instead of doing a Las Vegas short sale and the reasons are generally because the seller does have a decent paying job or assets easy for a lender to go after within the next six years. Even though the Las Vegas home owner would have to be eating Ramen three times a day to keep their artificially inflated home / loan.. they could keep it. Even for home owners who have temporarily lost their jobs… the lenders can still go after them for up to six years down the road after completing a successful Las Vegas short sale when they are back on their feet.
Due to this Nevada Law — It’s My Opinion that this has created more Strategic Defaults in Las Vegas then anything else which has certainly done more damage to Las Vegas Home Values then if it would have been written opposite. (6 Months for a short sale or Pre-Foreclosure Sale and Six Years for Walking Away.)
IN FACT: I know of Several Cases where the Loan Servicers WOULD NOT waive their future Deficiency Rights for Las Vegas Homeowners attempting to do a Short Sale and the Homeowners ELECTED to let their Las Vegas Home go to Foreclosure instead of continuing with the short sale and letting their Las Vegas become another SAD Foreclosure Statistic.
Is there any wonder why Las Vegas is #1 in the nation when it comes to the percentage of homes that are being foreclosed on IN The NATION?
Financially… Las Vegas Homeowners could be being rewarded from just walking away. Morally though… it’s just wrong not even attempting to work with the loan servicer.
I’ve seen FAR MORE destroyed Las Vegas Bank Owned Homes aka REO Homes then Las Vegas Short Sales. In fact… the worst I’ve seen on Las Vegas short sales are some bad tenants who were just slobs and left the home dirty. Nothing that required more then $5,000 in work to repair.
Will Fannie Mae Pursue Deficiency Judgements?
Well… considering they have full taxpayer backing and what seems like an unlimited amount of money I would put money on it that they will be filing deficiency judgements. Filing judgements will be a stimulous all of it’s own paying off Attorneys to pursue Strategic Defaulters and considering the case that can be made on the damage Las Vegas foreclosures do to the neighborhood and Las Vegas Community, it’s going to be hard to get any sympathy.
Personally… certainly no sympathy from me since I’ve seen if first hand.
Adding to that sentiment is the $100 Billion plus that the U.S. Taxpayer has been billed in keeping Fannie Mae and Freddie Mac’s doors open. Obviously… we are already in extreme deficit spending mode and whether you pay your mortgage on time… or not… you (and your children) get to pay for people just walking away.
Federal Government Should Go a Step Further
In my opinion, the Federal Government should take this a step further. Remember the statement above from Fannie Mae and pay particular attention to the sentence in bold:
“Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.”
In other words… some states do not allow lenders to pursue deficiency judgements from strategic defaulters. Nevada allows up to six months for the first loan… six years for secondary loans for homeowners who signed loan documents prior to 10/01/2009. For Nevada Short Sales – Up to Six Years to pursue a deficiency judgement for homeowners who signed loan documents prior to 10/01/2009. This currently Encourages Las Vegas Homeowners to Strategically Default and not even attempt to work with their servicer and do a Nevada short sale. Studies show that homeowners who do a short sale, have a higher dollar amount returned to the investors that own the loan then foreclosures. See my report on Loan Servicer Time Frames to Perform a Short Sale that was performed by Deutsche Bank.
“Also worth noting (but no surprise) is that loan servicers who approve Short Sales actually do receive more money back to the investors then if the property ends up as a REO (aka Bank Owned) home.”
Federal Law trumps State Laws and in my opinion since the U.S. Taxpayer pretty much is guaranteeing over 90% of the loans and responsible for future bailouts with the New Financial Regulation Bill just passed, the rights of lenders in states such as Nevada to pursue Las Vegas homeowners that do a Pre-Foreclosure sale or Short Sale NEEDS TO BE CHANGED.
Personally… as somebody who believes contracts are contracts, I can’t believe I’m endorsing and pushing a change in laws that reneges on home loan lenders rights. HOWEVER… considering the major loan servicers such as Bank of America receiving Tens of Billions in Federal Taxpayer Dollars to keep their doors open and the fact that Hundreds of Billions of U.S. Taxpayer Dollars are going to end up keeping Fannie Mae and Freddie Mac in business… TOO BAD.
Besides that… the Nevada State Laws that penalize Nevada Homeowners from doing a Nevada Short Sale or Pre-Foreclosure Sale was just a BAD LAW to begin with. Penalizing Las Vegas Homeowners who are trying to do the right thing for the Las Vegas community and rewarding Las Vegas Homeowners that just strategically walk away is WRONG.
Personally… I’d really like to know who the Nevada Legislator was that wrote up the original bill… and all of the supporters that made it Nevada law so I can research how much Financial Institutions contributed to their “campaign” funds. I’m sure it would certainly be interesting to see.
Are You a Nevada Resident and Agree?
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Paul Francis – REALTOR
Prudential Americana Group – REALTORS
Las Vegas Real Estate
702.592.3058
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