Fannie Mae Will Deny New Loans to Homeowners Who Walk Away

Fannie Mae, the mortgage guarantor 80 percent owned by the U.S. government, will temporarily deny new loans to borrowers who deliberately default and walk away from their homes.

Borrowers who have the means to make mortgage payments and don’t work with lenders to restructure loans will be banned from obtaining new mortgages backed by Fannie Mae for seven years from the date of foreclosure, the company said today in a statement. Washington-based Fannie Mae, along with McLean, Virginia-based rival Freddie Mac, own or guarantee more than half of the $10.7 trillion U.S. mortgage market.

“Walking away from a mortgage is bad for borrowers and bad for communities,” Terence Edwards, Fannie Mae’s executive vice president for credit portfolio management, said in the statement. “Our approach is meant to deter the disturbing trend toward strategic defaulting,” he said, adding that the firm will take legal action against borrowers who use the tactic.

Homeowners walking away from mortgages they can afford accounted for about 12 percent of U.S. mortgage defaults in February, New York-based Morgan Stanley said in an April report. Borrowers with bigger loans and higher credit scores were more likely to stop paying when they were underwater, or carried mortgages exceeding their property’s value, the report found.

More than 23 percent of all single-family homes were underwater at the end of March, up from 21 percent at the end of December, according to Seattle-based Zillow.com.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.