The Senate Banking Committee has just passed the Federal Housing Finance Regulatory Reform Act of 2008 by an overwhelming and bipartisan vote of 19-2.
Buried in the proposed legislation is something new and revolutionary, an effort to stop mortgage walk-aways.
Walk-aways arise when a borrower can no longer make monthly mortgage payments or sell the property. Rather than wait for foreclosure, the borrower simply sends the keys back to the lender. This is not a minor matter. Fitch Ratings reports that "the apparent willingness of borrowers to 'walk away' from mortgage debt has contributed to extraordinarily high levels of early default, which is particularly noticeable in the 2007 vintage mortgages."
Unfortunately, sending back the keys is not the same thing as giving up title. The lender must get the public records changed, a process made both difficult and expensive when a borrower cannot be found.
Worse, while property ownership is in limbo the home can be damaged by weather, vandals and squatters.
The Senate legislation addresses the walk away issue by saying that before borrowers can get FHA financing they must certify that they have not intentionally defaulted on any debt, not just their current mortgage. Lying about this issue can be considered perjury, and perjury can result in a jail sentence.
No less important, if a homeowner has walked away from an FHA loan, then the borrower would have to repay the government for any loss on the property -- potentially tens of thousands of dollars. In the same way that we should hold lenders to certain standards, borrowers also have an obligation to meet certain requirements. Sending back the keys -- creating so-called "jingle mail" -- is not fair and it's not right. The Senate committee has the correct idea: Walking away from a mortgage should not be a free pass to new financing, especially financing insured by the federal government.