Strategic Defaults are becoming such a problem that, Fannie Mae is now taking action to penalize borrowers who could pay for their loans but walk away and just allow the properties to foreclose. Here is some information from the Wall Street Journal:
Fannie Mae said on Wednesday that it would “lockout” borrowers from getting a new loan for seven years if they “strategically default” on a property. The move is the latest effort by the mortgage industry to stem major losses that could result if more borrowers who can pay their mortgages choose to walk away because they owe far more than their homes are worth.
The government-owned mortgage-finance giant said that borrowers who walk away but have the capacity to pay for the loan or didn’t complete a foreclosure-alternative in good faith would be ineligible for seven years from getting a new loan backed by Fannie. Borrowers with “extenuating circumstances” might be able to get a new loan sooner.
“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,” said Terence Edwards, Fannie’s executive vice president for credit portfolio management. The company said it would also take legal action to recoup the amount of lost mortgage debt in states that allow for such deficiency judgments.
The move comes amid greater concern that American homeowners, particularly in areas that have seen huge home price declines, may be ready to walk away from loans they can pay. Some 24% of homes with a mortgage are underwater, or worth less than the amount owed, according to CoreLogic, a real-estate research firm. A Morgan Stanley report estimated that around 12% of defaults in February had been strategic.
via Fannie Wants To “Lockout” Borrowers Who Strategically Default – Developments – WSJ.
While economically it makes sense to strategically default, morally there are issues with it. Allowing a home to foreclose, just because it is underwater is, doing more damage to the wounded banks, and the neighborhoods where the foreclosure homes are found.
I think Fannie is making a good move to try and discourage those who are strategically defaulting. In a few years though, this could be costly for those who should be home owners, but can’t because they strategically defaulted. There is also the possibility that there will be other mortgage options that won’t take into consideration strategic defaults.