Homeowners Should Think Twice if Considering a ‘Strategic Default’

Dennis Norman

Last month I wrote about a new policy implemented by Fannie Mae that would “lock-out” borrowers from getting a Fannie-Mae insured loan for 7 years if they did a “strategic default” or otherwise did not act in good faith and were foreclosed upon. In a nut shell, the borrower that Fannie Mae is targeting here is the borrower that has the financial ability to make their payments, accept a loan modification or other “work-out” from Fannie Mae but instead chooses just to walk away from their home and letting the lender foreclose.

In addition to locking out borrowers from a new loan for 7 years Fannie Mae has also made it clear in a recent announcement that they will “take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans“. Obviously, they can only do this in those States that allow a lender to sue a borrower for a deficiency but if you live in one of those states are are thinking of doing a strategic default on a Fannie Mae insured loan, you may want to think twice. Or at least be sure you get appropriate legal advice first and explore other options that are available to you.

Fannie Mae said that this month (July) they will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.



Fannie Mae’s New Rule Punishes Borrowers That ‘Walk-Away’

Dennis Norman

So, you have the money to pay on your ‘underwater’ mortgage, or to afford the reduced payment amount offered to you under the HAMP program, but think, rather than throw good money after bad you’ll just do like so many borrowers are doing and ‘walk-away‘? Well, if you have any plans to buy a house again in, say the next seven years, particularly with a Fannie Mae loan, think again.

Today Fannie Mae announced policy changes to “encourage borrowers to work with their servicers”. These policy changes include, a seven-year “lock-out” period for borrowers that default that had the capacity to pay, or did not complete a workout alternative offered to them in good faith. Those borrowers will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers that in fact do have extenuating circumstances may be eligible for a new home loan in a shorter period.

“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management. “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.”

Thinking about a “Strategic Default”?

There has been a lot of talk lately about borrower’s that “strategically default”; for example, borrowers that have the ability to pay their mortgage payments but stop doing so in the hopes they can get out from under their home in an easier method than selling it in a down market, particularly if they are underwater on their mortgage.

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. These policy changes were announced in April, in Fannie Mae’s Selling Guide Announcement SEL-2010-05.