Fannie Mae is upping the bet on strategic default of home mortgages Wednesday, saying that borrowers who default despite having ability to pay 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 have been numerous online offers. The House actually passed the FHA Reform Act with a provision for penalizing strategic defaulters within the bill.
Consequences of strategic default
Fannie Mae, which owns or guarantees more than 50 percent of mortgages within the U.S., wants 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, executive vice president for credit portfolio management at Fannie Mae, Terence Edwards, said “Walking 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 frame.”
Fannie Mae wants to sue strategic defaulters
Within the press release, Fannie Mae, said it plans to sue to recoup the outstanding mortgage debt from borrowers that strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement that could 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 what happens if the borrowers don’t pay: the bank evicts them and takes the home. It is very 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 they have to be hand over a certain percentage of their annual income before they walk away. The money individuals have left could possibly be used to move to an apartment, pay medical bills or to purchase shoes for their children.
Citations
Fannie Mae
fanniemae.com/newsreleases/2010/5071.jhtml
Washington Independent
washingtonindependent.com/87943/when-underwater-homeowners-walk-away
