Posts Tagged Strategic default
I personally feel this is a good thing. I’ve heard people say that they are going to walk away from their home because they are underwater on it. But this is short-sighted. The value will come back and they won’t always be underwater. A home is an investment like any other, sometimes you win, sometimes you lose, but if you stay in it over the long run you’ll win.
If you are making the payments and are not in financial trouble it’s best to stay and ride-out the storm. A foreclosure on a person’s credit record prevents you from buying a home again for four (4) years, and if the law can prove a borrower walked away out of spite, what’s called a “strategic default”, the length of time before a borrower can buy again is extended to seven (7) years.
Always behind the economic curve a little, Utah is just feeling the hurt now that the rest of the nation has felt for a couple of years, so things seem dark right now, but they will get better. Home values will come back, maybe not at the pace of the past 10 years, but we all know now that those values were artificially propped-up.
Fannie Mae Getting Tough on Home ‘Walkaways’
By E. Scott Reckard
RISMEDIA, June 25, 2010—(MCT)—Taking aim at homeowners who are able to pay their mortgage but decide it’s not worth it, Fannie Mae plans to go after them in court and to limit their access to home loans for seven years.
The government-controlled mortgage giant said that it would instruct the companies servicing its loans to recommend when it should pursue a so-called deficiency judgment—a court order requiring a defaulting borrower to pay any remaining unpaid portion of the loan after a seized home is sold.
Lenders rarely employ court proceedings to pursue foreclosures in California, nearly always opting instead for a streamlined procedure involving a trustee’s sale of the home. Under state law, lenders who opt for court proceedings can obtain a deficiency judgment if the mortgage was used to refinance a home, but not if it was used to finance a purchase.
“It’s not a hollow threat,” said Alex Creel, chief Sacramento lobbyist for the California Association of Realtors, which has called for legislation that would ban deficiency judgments in many cases of refinanced mortgages.
Fannie Mae also said it would make new mortgages harder to obtain for borrowers if it can be proved that they engaged in a “strategic default”—abandoning a home to foreclosure not because the required payments are unaffordable but because the mortgage is larger than the value of the residence. For such a borrower, Fannie said it would not buy or guarantee another home loan for seven years.
Borrowers who worked in good faith with their loan servicers to try to stay in their homes would be barred from Fannie loans for only two or three years, even if they eventually lost their homes after attempts at loan modifications failed.
The ban on getting a new Fannie loan is significant because home buyers have little choice these days for financing except for mortgages bought or backed by Fannie, its sister company Freddie Mac or the Federal Housing Administration. The three government-run entities financed 95% of new U.S. home loans last year.
Freddie Mac, which already blacklists strategic defaulters for five years, said it would study Fannie’s changes and “consider additional changes to our polices as needed to responsibly manage risks.”
Borrowers who default on FHA loans for any reason currently can’t get another loan insured by the agency for three years. Legislation pending in Congress would impose a lifetime ban on FHA loans to borrowers determined to have made a strategic default.
Fannie Mae’s get-tough policy on so-called walkaways is the latest fallout from the housing meltdown, which has eroded the once widely held belief in homeownership as the path to household wealth.
Foreclosures continue at a rate of 2.5 million a year, Federal Deposit Insurance Corp. Chairwoman Sheila Bair said, and some 11 million households owe more on their mortgage than their home is worth.
Fannie Mae’s new policies are designed to prod borrowers into pursuing alternatives to foreclosure, including short sales—transactions in which lenders allow a home to be sold and cancel the debt while accepting less than full payoff of the mortgage.
Borrowers who are slightly underwater—owing just a little more than their homes are worth—are unlikely to stop paying their mortgages if they have the resources, according to studies by research firm CoreLogic. But if the home’s value is at least 25% less than the loan amount, borrowers are far more likely to walk away.
Last March, 31% of foreclosures were described as strategic by the borrowers themselves, compared with 22% in March 2009, researchers at the University of Chicago and Northwestern University reported.
(c) 2010, Los Angeles Times.
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