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

In March, Fannie Mae sent out new guidelines to lend­ers intended for 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.

Free 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.

The walkaway trend is particularly noteworthy in former housing boom markets — including California, Florida and Nevada—where many homeowners find themselves up­side down on their loans, owing tens of thousands more than the current market value of their houses. If they in­vested little or nothing in down payments, some owners reason, continuing to make payments —even if they can afford to — may be throwing good money after bad.

A number of websites have popped up claiming to cut the hassles of bailing out of a mortgage. One company promises that clients “will be able to live in the home for up to eight months with no mortgage payments,”  after paying $995 for a customized plan. The same site says it will pro­vide clients with “legal credit repair” to “improve your FICO scores.”

Another website claims that “your credit can be re­paired and (you will) be able to purchase a house in as few as two years”—after paying a $495 fee. Still another company says walkaways can expect “up to one year liv­ing payment free” as the lender goes about filing for fore­closure. That company charges $995 for its how-to-do-it kit.

 

Fair Isaac Corp. of Minneapolis, developer of the FICO scores used in 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 events, nearly comparable with 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 trade lines in a consumer’s file, but “It is always significant.”

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 the principle debt eliminated to escape income tax liability for the amount forgiven. Walkways borrowers, by contract, have nothing forgiven and the IRS may de­mand income taxes on the balance they never paid, accord­ing to Migala.

When they apply for a loan from either Freddie Mac or Fannie Mae, she said, the standard application form asks whether they have ever experienced a foreclosure or handed over their deed in lieu of foreclosure. If applicants check “yes” the loan is immediately shifted to manual un­derwriting. Every piece of information is scrutinized by un­derwriters, who probe for the fact surrounding the loss of the house.

For borrowers who faced genuine financial hardships leading to foreclosures, underwriters are likely to be more sympathetic a few years down the road. But if you walk away, here’s the deal: Don’t expect to get a new home loan — certainly not one with favorable terms — for five to seven years.

That’s no matter what some promoter promised you online.

Kenneth Harney

San Francisco Chronicle Real Estate

kenharney@earthlink.net