Strategic Default

What Are Strategic Defaults? 

Typically, "strategic default" is defined as not paying your mortgage when you can afford to do so.   Most of the time, families that stop paying their mortgage cannot pay the mortgage--they don't have the means and they are heading to foreclosure.  Some home owners decide that the mortgage is so far "underwater" that they would rather surrender the house and default no the loan than continue to pay the mortgage.  If the homeowner is willing to take the consequences of breaking a contract (which is all that a home mortgage is), shouldn't he or she be allowed to?
 
Here in Ventura County, more homeowners who could pay their mortgage are deciding it just isn't worth it.  Last week, I posted information on the foreclosure market and the "heat" of that market in places like Ojai, Ventura, and Oxnard.  Is some of that activity from strategic defaults?

Proposed Government Actions to Discourage Strategic Defaults 

It is not against any law to stop paying your mortgage, whatever the reason. However, the banking industry is pressuring lawmakers and the government housing entities (Fannie Mae, Freddie Mac, and the Federal Housing Administration) to treat those who are deemed to have engaged in a strategic default differently.  Starting October 1, Fannie Mae implemented a policy that those who intentionally default when they had the capacity to pay or those who do not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage for a period of seven years from the date of foreclosure. Fannie Mae says the policy change is designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure.

This penalty is to be effected by a new set of waiting periods between a distressed real estate event and a borrower's eligibility for a Fannie Mae backed mortgage.

1. Those who sell through a short sale or execute a deed in lieu of foreclosure may be eligible for a new Fannie Mae mortgage in as little as two years.
2. Borrowers who can prove hardship or who sought a workout with the lender may wait as little as three years.
3. Those borrowers who went through a foreclosure will wait five years.
4. Finally, those who are alleged to have engaged in strategic default will have to wait seven years for a new Fannie Mae backed loan.

The press release on the above policy action by Fannie Mae is here.  The actual policy is located here.

There is an even more punitive law on the horizon.  H.R. 5072 would permanently deny FHA loans to those who are alleged to have engaged in a strategic default as follows:

The Secretary may not newly insure any mortgage under this title that is secured by a 1- to 4-family dwelling unless the mortgagee has determined, in accordance with such standards and requirements established by the Secretary, that the mortgagor under such mortgage has not previously engaged in any strategic default with respect to any residential mortgage loan.

STRATEGIC DEFAULT.—For purposes of this subsection, the term ‘strategic default’ means, with respect to a residential mortgage loan, an intentional default having such characteristics or under such circumstances as the Secretary shall, by regulation, provide.’’

Distinguishing Between Strategic Defaulters and Truly Distressed Homeowners

Distinguishing between the "truly distressed" and those who simply decide it is better to get out of a bad agreement by surrendering the security will be difficult, to say the least.  I foresee mountains of paperwork and appeals related to mortgage institution determinations about who engaged in strategic default.

All of this makes it more important than ever to work with an attorney as you consider modifying your loan, engaging in a short sale, pursuing a deed in lieu, or allowing foreclosure.  The way that a homeowner proceeds through these options (in good faith) could have a major impact down the road.  If you are considering one of these actions in Ventura, Oxnard, Ojai or our surrounding areas, contact Mansfield Law Office.