Las Vegas real estate, mortgage, appraisal blog

The Herald Tribune reported that Fannie Mae and Freddie Mac have both released guildelines to address the problem with "walkaways", people who have walked away from their mortgage. Penalties not only from the lenders, but from even the IRS, are facing these homeowners. The other big issue will be credit ratings, which will be aversely affected and will continue to be a factor for up to seven years.

Robin Stout Migala, consumer outreach manager for Freddie Mac, said in an interview that "there are so many bad reasons for walking away" from a home loan. Not only are borrowers' credit standings wrecked -- forcing them into excessively high interest rates on any credit they can manage to obtain. But they also face other potential problems, including federal income tax liabilities.

Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven. Walkaway borrowers, by contrast, have nothing forgiven, and the IRS may demand income taxes on the balance they never paid, according to Migala.

There are numerous websites that claim that you can live for free in your home for months and that then the same company can help your credit rating to rise again and that you will be able to buy a home again within a short period of time.

Fair Isaac Corp., developer of the FICO scores used in most mortgage transactions, is unhappy at any suggestion that a foreclosure could be minimized or wiped away in a short period of time. Its scoring model counts foreclosure as a long-standing and severe event, nearly comparable to bankruptcy, with negative consequences for all forms of credit that walkaways might seek to obtain. That includes credit card applications, auto loans, student loans -- and even insurance and employment.

FICO spokesman Craig Watts said that the impact of a foreclosure on an individual's score depends heavily on the payment history, length and number of credit tradelines in a consumer's file, but "it is always significant."

New guidelines have been enacted to make sure that this is how Fannie Mae and Freddie Mac are responding.

On March 31, Fannie Mae sent out new guidelines to lenders aimed at walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition is for three years.

Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680.

Freddie Mac, Fannie's rival, counts foreclosures as major credit blots for seven years, and a senior official said the company is now aggressively pursuing some walkaway borrowers "to preserve our deficiency rights" where permitted under state law.