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Subprime Crisis: Effects on Future Purchasing

By 3L at Seton Hall University School of Law and Editor-in-Chief of the Law Review.

Rachel Godsil and I will be publishing Protecting Status: The Mortgage Crisis, Eminent Domain, and the Ethic of Homeownership in Fordham Law Review later this year. A series of posts will follow on this topic. First--the effects of bankruptcy, foreclosure, and "short selling" on a homeowner's ability to purchase another home in the future.

New federal guidelines promulgated by Fannie Mae & Freddie Mac requires homeowners suffering foreclosure to wait five years before borrowing from the nation's largest lenders. Fannie Mae & Freddie Mac would also require a minimum credit score of 680, and perhaps most significantly, a ten percent down payment on future purchases. The down payment requirement presents a significant hurdle for homeowners with the least personal wealth--precisely the population that government policies have sought to bring into the fold of the ownership society. More targeted regulations should serve multiple ends more effectively. For instance, policies might rely on higher down payment requirements for investors, or homeowners who entered into adjustable rate mortgages that gambled on low interest rates continuing well into the foreseeable future, rather than blanket requirements on all purchasers with a foreclosure in their past. (Of course, the last clause is subject to the significant caveat that homeowners who were defrauded into higher cost mortgages should not be subjected to reentry barriers.)

Notwithstanding the rise of companies devoted to facilitating homeowner-walk aways (see here, here, and here), homeowners should do everything possible to avoid foreclosure. Options include renegotiating with the lender; looking for local, state, and federal assistance; or "short sales." As explained here, "a short sale involves the bank agreeing to let the borrower sell the property for less than what he or she owes on the mortgage." Short sales will negatively affect your credit score, but will be less detrimental than foreclosure, or worse yet, bankruptcy. Homeowners should also be aware that the walk-away plans are not as fail safe as they are made out to be--banks can still pursue a walk-away homeowner for a deficiency (sometimes leading to bankruptcy).

Full post as published by Urban Law Journal on May 26, 2008 (boomark / email).