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Fannie Mae: New Strategic Default Penalty

by admin on June 28, 2010

Strategic defaults have been steadily increasing in the residential housing market, as the stigma from having a foreclosure is lessened by the tidal wave of foreclosures across the country. These intentional defaults became such a problem that mortgage giant Fannie Mae now says that homeowners who choose to do a strategic default will be barred from getting another Fannie Mae mortgage for seven years.

A strategic default is when the homeowner can afford to keep making the mortgage payments, but chooses to default anyway because the house is now worth less than the mortgage balance.

In a recent press release, Fannie Mae warns: “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.”

In addition, the press release said: “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.” (California bars deficiency judgments after foreclosure if the mortgage was used to purchase the house. All other states allow them.)

With Fannie Mae’s 95% market share for all new mortgages, this is a serious threat to homeowners who decide to go this route.

{ 12 comments… read them below or add one }

1 Ryan July 5, 2010 at 12:35 PM

That is great but fannie Mae was a huge part of why the housing market took a dive. So why should they penalize home owners for some of the issues they have caused.

2 Howard Flaschen July 5, 2010 at 3:24 PM

I just did a Blog on this very topic a few days ago. I think the media, in a way, has made Strategic Defaults the cup du jour and home owners need to understand what theyre getting into before making a decision that could effect them for more years than they care to think about. I truly hope that the media spends just as much time on the pain that a strategic default is going to cause as they have in coming up with cool monikers like “Jingle Mail.” When in doubt seek assistance from a professional and when it comes to deciding between your options, when Strategic Default is on the table, that assistance is paramount.

3 Shirley Kelly July 15, 2010 at 12:58 PM

I’m sure there are many reasons why a homeowner would take this route. However, if Fannie Mae does not put strict rules and regulations in place now to discourage intentional defaults they are in danger of following the fate of their smaller counterparts by having to be taken over by the government or worse go out of business all together.

4 Palmdale Homes July 22, 2010 at 10:11 PM

There has been an increase in unemployment, which did cause many people to develop financial trouble, but I have to agree that the truth is, most people just didn’t want to pay twice what all their new neighbors are paying for their loan.

Imagine living in a house where all your neighbors are paying the same amount as you and they all default on their loan and new people buy up those houses at half the loan amount. Now you are left sitting there with a bulky loan payment while all your neighbors have it twice as easy.

I think that’s how the majority of homeowners saw the situation. Of course they probably figured if they let the house go, their credit would be better by the time the market would bounce back. However, I guess as it turns out, you don’t want to get Fannie Mae mad because there will be justice.

5 joney August 3, 2010 at 12:41 PM

Perhaps they should look into what they did to cause this mess in the first place before threatening the home-owners.

6 Antelope Valley Houses August 13, 2010 at 3:29 PM

Hello up there in Sacramento. I have to say it is somewhat tempting to walk away. My house is worth about $125K less than what I owe. The reality is I have to plans to walk away from my home… it’s my home.

I think they are right to go after these people with penalties… at least the ones who can afford their home and chose to walk away.

7 Real Estate Seattle August 24, 2010 at 5:45 AM

Great article, I just wonder how the government / Fannie and Freddie will
measure a strategic default. Will they actually require underwriting documentation for all clients with previous Foreclosures and underwrite the loan based on the borrowers ability to pay their mortgage 4, 5 or even 7 years ago?

8 Round Rock Apartments September 2, 2010 at 9:46 AM

I have mixed emotions when I hear a story like this. On the one hand it occurs to me that Fannie Mae played a central role in creating a real estate bubble that was bound to burst and destroy home values for years to come. On the other hand, I can understand why people point out that the borrowers didn’t have a gun to their head when they signed the mortgage. If I live in a part of California that has seen home values DOUBLE in the last five years, should I assume that I’m safe buying a home and expecting it to double again in a few years? Only if I’m a fool, and there were plenty of foolish homeowners to play a part in what has happened in the last two years.

9 The Captain September 14, 2010 at 9:03 AM

This is being done because of people’s own stupidity of buying what was and should HAVE Been a 150 k Home selling for 250 to 300 K,. If People would have questioned the price in the first place None of this Foreclosure mess would have happend to begin with,. and Yes if the prices didn’t boom up to what they were and raised steadly we wouldn’t have had a real estate / mortage market mealt downs either,.

again all caused by Stupidity of not questioning things.. just doing instant satisfaction and gratification .

10 Superbowl home rentals January 8, 2011 at 4:38 PM

I blame Fannie mae for a lot of the current crises. People think dallas was not hurt bad, but tell that to all the homeowners who were foreclosed on. The market will bounce back, but not thanks to Fannie Mae.

11 Calypso Bay January 11, 2011 at 8:43 PM

It’s unfortunate that this type of behavior has beset America. In Australia we don’t have this kind of downturn, as the Govt encouraged us to spend and keep our economy strong!

12 Brookside Kansas City February 7, 2011 at 2:55 PM

Nice to see an SEO savvy real estate site. So many are clueless. You have a great article, a dofollow blog and several quality comments, well done.

Re the article: So its OK for the government to walk away from a sound monetary policy, but homeowners can’t walk away from the aftermath of a government created problem? C’mon folks.

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