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No More Mortgages – Ever…


Fannie Mae Changes

I’ve recently been pontificating on the effects that the current real estate market will have in the future. I feel at times, that we’re so wrapped in survival mode, that we haven’t taken the time to see what may happen in the future. To that end, I was trying to look at the effects of Fannie Mae’s recent change (May 31, 2008) to provide underwriting guidelines for applicants who have past foreclosures and shortsales on their credit reports. According to the new guidelines, people who have suffered a foreclosure will be ineligible for a loan, for a period of five years and those who have sold as a Short Sale will be denied for a period of one year.

Left with Questions

I certainly feel that the time frames for loan denial are reasonable. However, I’ve heard many arguments that a significant cause of the current housing crisis is the fact that many people who shouldn’t have had loans, received them anyway. I’ve heard a few agents say that people who have had foreclosures, or even went through a short sale, shouldn’t be given any mortgages at all. I’m surprised at this mentality from practitioners. I know that many of us have sat with desperate clients who have done everything possible and just couldn’t sell today, at yesterday’s prices. I know that I have talked to many agents who feel helpless while meeting with clients who have been hit with really hard economic times, medical issues or other devastation.

Play it Out

Let’s say that we add the people before this market who have had foreclosures to those 30 percent or so that are going through it now. Now, let’s say that we follow the mentality of some practitioners in this regards. We’ve now started to alienate a large number of potential buyers, who may be able to overcome their immediate life issues and find themselves in a better position six years down the line. Many of these folks will also be turned down as renters if they have foreclosures on their credit histories. So, where exactly are they and their families suppose to live?

Watch What You Say

For those who are vocal on blogs and other searchable medians, what does this say to their current clients who may be struggling? I suppose some level of benevolence would be expected from a profession that is suppose to act as if they were walking in their client’s shoes. Understanding of the unfortunate position of some people is a necessary aspect of working with clients.

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If those in this industry can’t find compassion and a heart for the consumer, than who can?

Written By

Matthew Rathbun is a Virginia Licensed Broker and Director of Professional Development for Coldwell Banker Elite, in Fredericksburg Virginia. He has opened and managed real estate firms, as well as coached and mentored agents and Brokers. As a Residential REALTOR®, Matthew was a high volume agent and past REALTOR® Rookie of the Year & Virginia Association Instructor of the Year. You can follow him on Twitter as "MattRathbun" and on Facebook. Matthew's blog is TheAgentTrainer.com.

14 Comments

14 Comments

  1. Paula Henry

    June 23, 2008 at 8:50 pm

    Matthew – This is a serious topic affecting way too many people who just hit upon a hard times. What do you say to the people here in the Midwest, who because of floods and lack of insurance, walk away from their homes and let the bank have them back. Or, the client who tried to work through a divorce, but the house didn’t sell and there wasn’t enough money?

    Sorry – you can not buy another home – heck, we won’t even rent to you.

    Sure, there are plenty of people who didn’t read the fine print or sincerely believed they could refinance out of their current loan, except the market changed. Some just made bad choices. Certainly, there were many who should not have been given a loan – but they were buying their piece of the American Dream. they had hopes and dreams, which have been shattered.

    There are even a percentage who obtained property unethically through liar loans and deceit. I have not seen this to be the case for the majority here in Indiana. At least not the people who call me.

    I have seen many cases which break my heart and all I can say is:

    Except for the Grace of God…………

  2. Matthew Rathbun

    June 23, 2008 at 9:01 pm

    Paula,

    I think the few people who potentially set out to deceive or “play” the market are so minimal that it doesn’t justify punishing everyone.

    Many people (including some agents) didn’t read the fine print that even some attorneys can’t easily decipher. I think that there should be some restrictions to give one time to get their life back on track and learn to control their finances, but not a blanket life long scarlet letter….

  3. Ken Smith

    June 23, 2008 at 9:23 pm

    Ignorant people say some really stupid things.

  4. Shailesh Ghimire

    June 23, 2008 at 9:31 pm

    I haven’t heard anyone say that mortgages should be denied, but then again that doesn’t mean it hasn’t been said. You raise a great question here. I too agree those limitations are really reasonable, but the five year limit is too high in my opinion. They should reduce it to four years.

    The key factor regardless of the time limit is credit management post-foreclosure and post-short sale. Underwriters will be very interested in seeing how the applicant has managed their finances after such a dramatic financial collapse.

    As far as the whole mess, I think Fannie Mae and others need to put tight reigns on income verification and holding the DTI limit with no exceptions. That will pretty much ensure that the borrower is able to afford the mortgage. I haven’t looked at the numbers recently, but a lot of the foreclosures are occurring due to those stated income loans. Which allowed ANYONE to over extend themselves. I think if you go back to properly documenting income and holding to a tight DTI then I don’t see any problem in giving mortgages to those who have reasonable credit even after a foreclosure or short sale.

  5. Michelle DeRepentigny

    June 23, 2008 at 10:02 pm

    What disturbs me about the 5 year and 1 year guideline/rule is that I am seeing such a flood of short sales that are not being processed in an efficient, timely manner. So many are trying to short sale and failing, then going into foreclosure. Why is this fair, either make it 5 years for all who default in any way, or 1 year. Education is going to be the key to keep people out of this situation and unfortunately many consumers are still not going to receive that.

  6. Matt Wilkins

    June 23, 2008 at 10:42 pm

    This also brings up the point that too many homeowners do not take the intiial steps of trying to work the lender on a solution and skip straight to trying to short sale property (many times listing it beofre submitting the required paperwork). Many people have been able to work with lenders and obtain short/long term solutions that are a win-win. The ones that throw up their hands should be the ones that take the brunt of the credit damage.

    I belive that the numbers of months that the person canot buy for should be based on the on their credit situation beofer the short sale or foreclosure. Many clients have good credit but have to dispose of their home in some manner due to job transfer or needing more space. It is not completely thier fault that the home is worth significantly less than wht they paid for it. Yes they should not get off scott free but they should also not be punished to the fullest extent.

  7. Thomas Johnson

    June 24, 2008 at 12:12 am

    This is fluid. As soon as there has been adequate recapitalization of the lenders, they will be back. This process may take years, however. Let’s hope that FHA continues to be funded by the politicians. Time will be need to clear the excess inventory of houses.

  8. GP

    June 24, 2008 at 1:54 am

    Who exactly is going to buy all these foreclosures??? Not homeowners attempting to downsize after being forced out of their home. Not investors looking to rent to those unable to buy…

    With Freddie Mac now limiting investors from owning more than 4 properties before they’re limited to portfolio loans, it seems like Washington doesn’t want ANYONE to own homes but the lenders?!

    And of course, the numerous foreclosure scam laws that have been pressed into place are a mess of legal confusion, which has scared off most ethical investors who had been acting respectably and buying houses before the courthouse steps… (I asked three attorneys in my state about a confusing part of the new FC law, and got three different answers!)

    There is so many knee-jerk reactions and hasty policies being made in government halls all over the country these days, my sense is that a good many of these actions are bound to make the situation worse, before it gets better. At some point, preventing supply and demand from acting only delays the inevitable pain…

  9. Anne

    June 24, 2008 at 7:14 am

    What a great post. As a REALTOR and an investor I’m seeing the same things. I am currently working with several clients who had the misfortune of purchasing at the peak of the market and then having a “life crisis”, ie divorce, job loss, health issue and finding themselves unable to afford their homes. Often these are people who took a part time second job and cut back to try to protect their credit. I believe a short sale is most often the answer, and if they recover financially they should be able to buy in the future. I don’t think a year is too long to wait, and in fact most people will take longer to become financially stable again. However, that being said, I do think that people who lied about their income and just plain over extended themselves buying “stuff” with their equity lines shouldn’t necessarily be given carte blanche to do it again down the road. I have tenants, and when I do a credit screen I look beyond the foreclosure to see how thay managed their other debt.

  10. Danilo Bogdanovic

    June 24, 2008 at 12:47 pm

    My parents told me two things once upon a time…

    “The only person you have to blame for your mistakes is yourself.”

    and

    “Don’t sign anything before you’ve read it and understand it fully”

  11. Melina Tomson

    June 24, 2008 at 2:20 pm

    I think there is a difference between people that have a life event occur and people that just overspent themselves. You can’t help a flood, medical problems, job loss, etc. In the past year, I have only seen one true “hardship” and it really was sad for the family. I would have loved for the lender to recapitalize their loan for them and offer a period of forebearance. It would have been the right thing to do.

    The rest were people whose eyeballs were bigger than their wallets. I just don’t have a lot of sympathy for people that don’t know how to live within a budget. Sorry, I don’t.

    I like the idea of the stagger because there would be some incentive to try and negotiate the sale for a seller vs. sticking their head in the sand. The problem, as someone else posted, is that trying to negotiate a short sale is so painful for all parties involved.

    What I hope comes out of this mess is 1) a return to common sense budgeting, and 2) better trained agents and mortgage brokers that can help buyers understand some of that fine print. The fact is that this is what we do day in and day out. People really do rely on us for guidance, and I know I am work hard with my buyers to understand the budgetary constraints of a home purchase.

  12. Robert D. Ashby

    June 24, 2008 at 9:17 pm

    Did we forget about all of the investors speculating, floppping, etc.? I think the guidelines should be similar to those involving bankruptcy. If you have been in a foreclosure within the last 4 years, your out unless you can justify it with documented viable reasons (divorce, job loss, etc.) Don’t punish the ones that fell on hard times and lost their home that way, but come down hard on the ones who deserve wrath.

    I know investors probably hate for those comments, but taking a whole picture view of their financial and investment plans would keep them from being in that situation in the first place. Investing is not for amatuers unless you are willing to take a “spanking” and are seeking porper advice.

  13. Matthew Rathbun

    June 26, 2008 at 6:28 am

    Robert,

    I didn’t forget about the investors, but I don’t think people who have received orders to move, had medical or life issues, etc… should suffer because some investors weren’t very good at it.

    Perhaps a different set of rules for primary residence versus investment and second homes?

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