Strategic default is a term that has gained notoriety over the past couple of years. It is the bi-product of this generation’s economic implosion. Economic hardships are not new or unique to the present time. The “Great Depression” (1929-1933) resulted in unemployment rates that peaked at 24.9% in 1933. Times were so bad that it took a world war to recover, but the idea of someone making a strategic default was unheard of especially for someone who could afford and was able to make the monthly mortgage payments.
Most strategic defaults come as the result of a borrower deciding that they owe more on their home than it is worth (underwater) so, they choose to abandon the loan and just stop making payments. To and insult to injury many borrowers remain in the home in some cases up to 2 years rent free. Strategic defaults have become the American dreams dirty little secret. Federal intervention has been absent up till now.
Fannie Mae has decided to end the free ride by implementing new guidelines that add additional penalties to borrowers that make the fateful decision to walk away from their mortgage obligation. Officials at Fannie reported that they will deny potential borrowers seeking loans backed by their agency if they have walked away from a mortgage that they were able to pay for. This new penalty will remain a factor for 7 years from the date of the original strategic default. Fannie Mae also stated that they that want to start seeking financial judgments for the balance remaining on the loan after the sale of the property. These two penalties could be a game changer for borrowers considering a strategic default.
Defaults and foreclosure have become the new stitch in our financial fabric. The last decade has been fraught with excess and personal indulgences that have created a financial disaster for many Americans. It is going to take time and unprecedented government oversight before calm will return to the unsteady housing market.
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Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative 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. – Seven-Year Lockout Policy for Strategic Defaulters
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I hope the government and banks come down hard on strategic defaulters. They make my blood boil. There have been several in my neighborhood this year.
Of course people are going to default when the mortgage amount on a property is higher than the value of the property itself. This is particularly true if they can rent a similar or better property for less than their mortgage. Some call this practice irresponsible and even amoral, but there are financial advisers who have decided to include strategic defaults as part of their financial solutions package as it is obviously the best strategy. I think its high time for the federal government to intervene and iron out this issue.
Crisis happens periodically, each one has it’s grounds any time, but i think no one country alone can avoid in future and needs effort of world community, but each government should understand that not right financial policy harms not only their country, we could see it with situations in europe (spain and greece). this circumstances should come to more effective control tolls from world financial organizations.
I also hope the government and banks come down hard on strategic defaulters.
These ‘strategic defaulters’ are what’s making it even more difficult for true buyers to get financing and for existing owners facing default to be approved for programs to help them. The lack of accountability/responsibility is appalling.