Fannie Mae plans to announce changes to its underwriting guidelines at the end of the month that will create disincentives for borrowers to walk away from properties.
Marianne Sullivan, the government-sponsored enterprise's senior vice president of single-family credit policy and risk management, said applicants with a foreclosure in their past will have steeper requirements to qualify for a new mortgage if it is to be purchased or guaranteed by Fannie, including a higher minimum down payment and FICO score.
She said she is increasingly concerned about Web sites and late-night television commercials in which companies peddle advice to borrowers about how to walk away from their homes.
"We want borrowers who can pay to continue to meet their obligations. If they can pay and don't, there should be repercussions," she said.
"The next time around they shouldn't get the same treatment as others who pay their obligations."
Fannie wants borrowers who are thinking about abandoning their mortgages even though they are current to become "fearful, because right now, they're not," Ms. Sullivan said.
However, Fannie will take into consideration situations where a borrower experienced a true hardship, she said.
The GSE is considering tighter requirements for borrowers who want to buy a new home and convert an existing one to a rental property, because in some markets borrowers are walking away from the old loan once the new home is obtained, Ms. Sullivan said.
You Walk Away LLC of Carlsbad, Calif., says on its Web site that it charges troubled homeowners $995 for a "protection plan and kit" and consultations with a real estate lawyer and an "advocate."
Walk Away Plan LLC of Glendale, Ariz., offers similar services and says on its Web site that lenders "won't be able to collect any loss caused by you walking away" and that the borrower will be able to repair his or her credit and "purchase a house in as few as 2 years."
Last month Fannie increased the period of time to five years, from four years, that borrowers with a previous foreclosure have to re-establish their credit and obtain a Fannie-backed mortgage.
In February, Fannie's chief executive officer, Daniel Mudd, said on a conference call with analysts and investors that speculators walking away from their homes despite their ability to pay represented a "moral hazard," which means they were not being discouraged from such behavior.
This week Congress is to vote on legislation that would create a fund to guarantee $300 billion of refinanced mortgages through the Federal Housing Administration.
Both the bill sponsored by House Financial Services Chairman Barney Frank and the one by Senate Banking Chairman Chris Dodd are designed to prevent speculators from qualifying for the refis. However, both lawmakers have acknowledged that some undeserving borrowers will slip through the cracks.
Regina Lowrie, the founder of Vision Mortgage Capital LLC, a unit of the $265 million-asset American Home Bank in Mountville, Pa., said whatever relief plan that Congress puts forth should help those truly in need "but not allow speculators to do a cash-out refinancing and then take out another home equity line of credit a year from now."
"Why should a servicer take a haircut or have a cram-down for any borrower that truly has the ability to pay?" asked Ms. Lowrie, a former chairman of the Mortgage Bankers Association. "There were speculators that bought with every intention that the value of the home would increase and they would flip it."
Terry Couto, a partner in the Tampa office of Newbold Advisors LLC in Bethesda, Md., said servicers are having difficulty determining which borrowers are genuinely facing hardship.
"Many of these borrowers are working with credit counselors, who are telling them that servicers will not offer them loan modifications or other workout solutions unless they're 60 days delinquent and have quit making their payments, but if they quit making their payments they cannot qualify for a new loan," Mr. Couto said. "So how do the servicers know the borrowers aren't just taking advantage of the situation?"
Peter Wallison, a resident fellow at the American Enterprise Institute and a former Treasury Department general counsel, said he does not think any legislation will keep speculators or other borrowers from abandoning properties, and many may do so despite getting relief.
"Even if you write down the value of the home and the lender takes a big loss, and you extend the new loan over 30 years at a fixed rate, there's no guarantee that a borrower won't walk away from that too if home values decline," he said. "Often these homeowners can look across the street and see a house that is exactly like their own renting for half the cost, and they're walking away for that reason."
George G. Kaufman, the John F. Smith Professor of Finance and Economics at Loyola University in Chicago and a member of the Shadow Financial Regulatory Committee, said borrowers have always had the option of not repaying, and walking away from their loans, with some penalties.
"It's very difficult to target in on the people with actual need, who may have been misled, versus the person that went into a contract with their eyes wide open," Prof. Kaufman said. "Most Americans do not want to protect those borrowers that were speculating."
