Posted by: docktohome | August 31, 2011

Will new restrictions halt strategic defaults?

In 2008 homeowners were starting to face the music that they owned a property that was worth much less then they had purchased and indebted it for.  For most underwater homeowners this fact meant that they would be paying for a mortgage that was based on a valuation that they would likely not see again for years, decades, or never.  Today the battle lives on and homeowners continue to lose their homes to foreclosure.    The realization that the owner would never be able to redeem any equity on their property gave birth to the strategic defaulter. Different than an involuntary mortgage default, a strategic default is when the homeowner  has the ability to continue to pay the mortgage but decides that it is more ‘strategic’ to just
walk away.  The homeowner that strategically walks away usually does so after they were unable to modify their existing loan.  Although they have the financial ability to continue paying today they might be dipping into savingsor money that would otherwise be set aside for emergencies.

Since its first appearance there have been some negative reactions to the idea of a strategic default. The argument being that it was somehow immoral because if you borrow money and agree to pay it back then you should keep your word.  I can both agree and disagree with this idea.  If you are planning to perform a strategic default but might use the money saved to purchase other luxuries, this is an immoral decision.  On the other hand if you are planning a strategic default to save yourself from completely drying out all savings and want to move on before it’s too late, DO IT!

With strategic defaults becoming increasingly prevalent since 2008 companies such as Fannie Mae have started to implement more serious
implications for these defaulters.    The implications are an increased wait time in the homeowner’s eligibility to receive another Fannie Mae loan.  Previously a homeowner who had worked with the bank to walk away through a short sale or foreclosure could be eligible for another Fannie Mae loan after 2 years with 20% down payment.  The new stance of Fannie Mae and supposedly Freddie Mac also is this: a homeowner who is unwilling to work with the bank to work out there current loan will not be eligible for another loan for 7 years regardless of the down payment.

For more information on the topic and further details on
Fannie Mae’s regulations visit: http://firsttuesdayjournal.com/fannie-mae-our-government-and-strategic-defaults/

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Responses

  1. This is an interesting dilemma and I see the problem only getting worse as more and more people fall underwater. You bring up interesting points about the immorality of it, but let’s face it, the banks had a very big hand in causing real estate values to plummet. Back in the mid 2000’s anyone with heartbeat could get a mortgage…we’re all seeing how that turned out, and the responsible mortgage payer is left holding the bag paying for a home that is no longer worth anywhere near what was paid for it. Given this, I think the morality issue holds little weight…were the banks acting in a moral manner handing out loans to individuals they knew had no chance of ever paying them back? These are very interesting questions…time will tell how it plays out, but I think more and more people will start to “smarten up”. Great post!

    • Thanks for your input. I agree with you in that the decision to walk away from your home before you absolutely have too, is a logical, not immoral, decision. Although many borrowers over leveraged and ignorantly believed their lenders who told them they were ‘qualified’, ultimately the professionals (bankers, mortgage officers, appraisers, etc) hold the highest responsibility to provide logical guidance. The logic was left behind for the prospect of making more money and these trusted opinions were only a mirage. As you said, only time will tell.


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