Fannie Mae Takes Aim at Strategic Default

The majority of mortgage holders in American can and do pay their note each month. As foreclosures have increased among those who unable to pay, a new class of people who can pay but choose not to, is also increasing in Orlando and everywhere. These strategic defaulters justify abandoning their mortgage because their housing values have shrunk. With no housing inflation in sight, they see default as the best business choice. Knowing that they will take a credit score hit, they may plan for their new life and just stop paying. Some people think this amoral, while banks discourage it. Up to now, the benefits outweighed the consequences.

Fannie Mae has had enough. Fed up with strategic defaulters who bail and buy a new home within 1-3 years, the government-sponsored agency that that backs mortgages recently announced a new policy that will prohibit those suspected of intentional default from obtaining Fannie Mae loans for seven years. Effective July 1, Fannie Mae may also start coming after the balance.

According to the new policy "Defaulting borrowers who walk away and had the capacity to pay or did not complete workout alterative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. 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." FHA policies are likely to follow.

On the surface, the new policy seems fair. After all, housing is a long term investment, not an ATM. For a few years prior to 2006, escalating prices turned the focus away from what was always true: buying a home was mainly to provide shelter and security for your family. Those who gambled and lost shouldn't be rewarded for abandoning their investment.

On the other hand, some who can technically afford their house payments might be penalized. A recent story in the Washington Independent cited the case of a family who could easily pay their $1,100 house payment until the wife lost her $60,000 a year job over two years ago. The family got loan modification under Making Homes Affordable but the payment is still 56% of the family income and allows for few other necessities. The family cannot continue to pay this kind of mortgage and anticipates losing the house. Technically, a family like this could be considered "strategic defaulters" even though they do not fit all aspects of the profile.

A study by Experian and consultant Oliver Wyman found that 588,000 families defaulted in 2008, especially in hard hit states like Florida and Nevada. They went from perfect credit records where payments were up to date to suddenly not paying their mortgage; this pattern prevailed in many of 850,000 homes foreclosed on that year. A more recent Federal Reserve study showed that only the deeply underwater walked away, and this was usually after an "income shock." Yet the stereotype prevails that families just stop paying the mortgage and head for Disney World.

Fannie Mae is sending a message with its new policy that being underwater is not enough to let people off the hook with their mortgage. How they differentiate between those who just can't pay and those who can but won't will generate plenty of discussion in the days ahead.

Can't pay? A short sale might be your answer. I'm Janice Petteway and I can help you. Or, if you are prepared to take on homeownership, affordabilityand interest rates on your side. My Exit Results Real Estate team can help you find the affordable home of your dreams in the Orlando and other Central Florida cities.