John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... Take a poll on strategic defaults at the bottom of this blog.
If you can afford to pay your mortgage, but you are contemplating a “strategic default” because your loan is worth more than your mortgage, you might think again.
Defaulting borrowers who walk-away from their mortgages who have the financial wherewithal to pay - or did not complete a workout alternative in good faith – will be ineligible for a new Fannie Mae-backed mortgage loans for seven years from the date of foreclosure, the government-controlled mortgage-finance giant announced last week.
Those borrowers also could face legal actions. Borrowers who have extenuating circumstances may be eligible for new loans in a shorter time-frame.
“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management for Fannie Mae, when the new policy was announced. “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 period of time.”
Fannie Mae seeking deficiency judgments
Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In July, next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.
Troubled borrowers who work with their servicers, and provide information to help the servicer assess their situation, can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. A borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances.
1 out of 4 home mortgages underwater
It’s estimated that as many as 25 percent of the loans in the U.S. are underwater – that is, the mortgage is worth more than the home. And 12 percent of all mortgage defaults in February were estimated to be strategic defaults, according to a Morgan Stanley report.
Local experts applauded Fannie Mae’s move.
“I think walking away from your mortgage when you can afford the payment, is just short of fraud,” said Ron Woodcock, a broker with RE/MAX Southeast. He said he has heard of people walking away from their mortgages, and buying another home at a depressed price, before the consequence of defaulting on the first mortgage is discovered and mars their credit record, which would have made it all but impossible for them to get the loan.
“People will do crazy things,” said Woodcock, who is doing a lot of short sales, in which the lender accepts less than the mortgage amount. “I think people really are cutting their own throat when they do things like walking away from a mortgage, when they can afford to pay it. A banker recently told me that they will go after people for judgments, even if it means turning them over to a collection agency. They will go as far as state and federal statutes allow them to. It might take a while, but it will catch up to them.”
Zachary Urban, spokesman for the Adams County Housing Authority, said that owning a home carries more of a moral responsibility than a stock, or some other investment, that an investor might dump if it loses its value. He said he disagrees with a professor of law at the University of Arizona, who argued that more people should be walking away from their mortgages, because it makes financial sense. Urban was alluding to Brent White, who in 2009 published a paper called Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.
Homeowners have moral obligation to pay, if they can
“I think you have to understand the ramifications of walking away from your house payment in a greater context,” Urban said. “It’s not like you have a stock option that is under water.”
In fact, it’s struck close to home for him- literally. Someone abandoned a house in his Wheat Ridge neighborhood about three months ago. He doesn’t know the circumstances, but that empty house causes the value of surrounding homes to drop in value; it hurts the school district that is not collecting property taxes; and can become a magnet for crime, costing taxpayers and municipalities extra money, at a time virtually all communities are strapped for cash. The home has still not entered the foreclosure process.
Of course, if you have a true financial hardship – or even finite resources and you know that you will run out of money to pay your mortgage in a few months – that is a different story, Urban said.
But a financial hardship might be losing your job, or becoming vastly under-employed, he said. “Your home losing its value is not a financial hardship, but an economic condition,” he was recently told by a Bank Of America official.
However, strategic defaults likely are bigger problems in states such as Florida and Nevada, where homes have lost far more value, than in Colorado.
“Our home prices in Colorado have not fallen as much, and there is a great likelihood that if you can hold on to them through this economic downturn, you will be able to recover your original value relatively quickly,” Urban said. “In places like Nevada and Florida, it may be many, many years before the values came back. If you paid $500,000 for a home that today is worth $225,000, it may not be reasonable for you to see those values coming back in the foreseeable future.”
Fannie Mae speaking for fearful politicians
Peter Lansing, president of Universal Lending (a sponsor of InsideRealEstateNews), said that in his opinion, Fannie Mae is speaking as a proxy for politicians.
“I think what you are hearing, is what politicians cannot speak,” Lansing said. “They are asking Fannie Mae to speak on their behalf. For whatever reason, no American politicians, from the mayor of the smallest city to the President, wants to say is that it is the American thing to do to continue to make your house payment, if you can afford it. Politicians are afraid to do that. So Fannie Mae, which now is really part of the government, is speaking for them. Yes, I know that true hardships do occur. People lose their jobs. People get sick and can’t pay their mortgages. People get divorced and can’t afford a mortgage that depends on two incomes. A true hardship is different than not wanting to pay your mortgage because your house is not worth as much.”
Still, he supports Fannie Mae’s get tough attitude with mortgage scofflaws.
“I just wish that President Obama would stand up and say that is not the ethical thing to do, that is not the American way. Don’t camouflage it through a government agency.”
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Banks enjoy a monopoly in the world financial system; homeowners do not. If homeowners could get a bail out from the Government like the banks have, we wouldn’t have a problem…or would we? Why is it ok for taxpayers to bail out banks, but it’s not ok for banks to bail out taxpayers? Double standard if you ask me. It’s no more unethical for homeowners to walk away from their mortgages than it is for a bank to take taxpayer money to bail themselves out of a jam. Bailing the banks out is a “strategic default” of the highest order.
@The Referee, you called it, bro! The federal goverment could have given the “bailout” money to the taxpayers so that we could then pay the banks, and everyone would have been made whole.
Instead, the banks got bailed out and the taxpayers got the shaft. Bankers preaching “moral financial responsibility” to underwater mortgage holders are showing a complete lack of empathy and understanding of the current financail state of the union.
Nobody’s bailing out my debt, and Congress made it extremely difficult to declare bankruptcy due to lobbying by the (surprise) same bankers who got bailed out.
Next time they can just go bankrupt and then some of these billionaire bankers can try takeing a spot in the unemployment line.
Don’t get me wrong; no one should be bailed out; banks or borrowers. Absent bailouts, you encourage responsibility and prudence. I just find it highly hypocritical that some support bail outs for banks, but call it fraudulent for homeowners that choose “strategic default” because they don’t have access to the Fed’s protection. Remember, the opposite of “progress” is “congress”; why do they call this a “representative republic” anyway…what a farce!