Housing Doom

As more and more homeowners are deciding to just walk away from homes that they either can’t afford or are no longer willing to pay for, lenders are starting to fight back: [Thanks L!]

The country’s two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing "walkaway" trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain.

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.

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On April 3, we discussed the story of the Ummels, the unhappy homebuyers that were suing their realtor.  The jury has ruled, and they are saying "caveat emptor":

Friday, April 11, 2008 | A jury sided Thursday with Carlsbad real estate broker Mike Little in a closely watched lawsuit that pitted a local couple against the agent that helped them buy a home. The couple, Vern and Marty Ummel, claimed that Little neglected to mention recent sales in their neighborhood, leading them to overpay by about $150,000 for their home in July 2005.

The case attracted national attention as it posed a hot question: What are the responsibilities of a real estate agent? The real estate camp was concerned that if the plaintiffs won Thursday, it would catalyze and focus a growing urge around the country to find someone to blame — and to hold financially responsible — when houses aren’t worth as much as their buyers once paid. Those who sided with the Ummels worried their case would be chalked up to rich people problems, a matter of a measly $150,000 in the scope of a million-dollar tract home near a golf course in North County.

With an enthusiastic and unanimous response, the jury found that Little had executed a reasonable standard of care when he showed his clients, Vern and Marty Ummel, more than 80 homes in a house hunt that began in May 2005, ultimately leaving them to their decision to pay $1.2 million for their house two months later.

Why did the jury side with the agent?

At least in this specific case, the Realtor was found to have exercised sufficient care in helping the Ummels find their house, including helping them negotiate other offers they made on houses before they settled on this one. That made an important part of the case Vern Ummel’s admission on the stand that after looking at so many homes, he had a good sense of value in the neighborhood.

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