Fannie Mae upped the ante on strategic default of home mortgages Wednesday, stating that borrowers who default despite having ability to pay or do not seek alternatives in good faith won’t be eligible for a new Fannie Mae-backed mortgage for seven years from the date of foreclosure. Strategic defaults are increasing along with home foreclosures. To help in strategic default, there are numerous online offers. The House really passed the FHA Reform Act with a provision for penalizing strategic defaulters within the bill.
Strategic default and also the consequences involved
Fannie Mae, which guarantees more than 50 percent of mortgages within the U.S., wants a lot more severe strategic default consequences. It is now refusing to back all of the new loans for walk-away borrowers for seven years after they abandon their homes. In a press release, Terence Edwards, executive vice president for credit portfolio management at Fannie Mae, said “Walking away from a mortgage is bad for borrowers and bad for communities, and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter time period.”
Fannie Mae to sue strategic defaulters
In the press release, Fannie Mae, said it may also sue to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement that will be given next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and make recommendations for strategic default cases that warrant the pursuit of deficiency judgments.
Defining strategic default
The strategic default issue is a thorny one because of the challenge to define what makes a default strategic. The Washington Independent reports that strategic defaulters aren’t really breaching their contracts. Every mortgage contract defines exactly what happens if the borrowers don’t pay: the bank evicts them and takes the home. It is doubtful the government could stipulate that homeowners have to hand over the last of their savings to the bank before they can walk away, or that that they might be made to hand over a certain percentage of their annual income before they get to walk away. The money individuals have left might be used to move to an apartment, pay any of their medical bills or to buy shoes for their kids.
Citations
Fannie Mae
fanniemae.com/newsreleases/2010/5071.jhtml
Washington Independent
washingtonindependent.com/87943/when-underwater-homeowners-walk-away
