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Friday, June 25, 2010

Fannie Mae Strikes Against Strategic Defaults

You may have heard or read recently about strategic defaults as this topic is all over the news. A strategic default is when a home owner walks away from their mortgage when they are still able to make the payments.

The reason why a home owner would consider a strategic default and just walk away is because the value of their home has dropped substantially below what they owe on their mortgage.

The general feeling amongst those that are using a strategic default is that it will take years for their homes market value to recover. They basically walk away from the property and start fresh.

Fannie Mae the government backed lending giant is putting into place simple measures that will discourage home owners from considering a strategic default. What does Fannie Mae plan to do?

They will begin “locking out” borrowers from getting new mortgages for seven years! They will also go after strategic defaulters for the money they owe in states where they are allowed to do so.

Those home owners who walk-away and had the ability to pay the mortgage 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.

Fannie Mae stressed that borrowers who make a good faith effort to work with their lender in order to resolve their situation will be eligible for Fannie Mae loans much quicker than those who just walk away.

Obviously the more homes in neighborhoods around the country that become abandoned due to strategic defaults puts further pressure on depressing Real Estate prices. Foreclosures and bank owned homes tend to bring down values of surrounding properties. Traditional home owners end up competing with these bank owned homes when selling their properties.

Some people that are using strategic defaults are doing so because they have become so exasperated at their lenders for not doing more to help them such as a loan modification. Anyone who has ever tried to get a loan modification would probably be the 1st to admit that lenders do not make it easy for a borrower to get one. Often times borrowers can’t get responses from banks to their questions and are repeatedly told to send in the same documents over and over again.

We have come across a number of properties where the owner just picked up and left. Often times I wonder why they did not take the necessary steps to try to avoid foreclosure.

It seems there are a lot of people that do not realize there are better alternatives that just bailing on their loan.

Short Sale vs Strategic Default

A short Sale can be a good alternative. The owner of the property benefits in this situation because they get out of a financially difficult situation without going to foreclosure which can seriously damage your credit.

Most of the time when your home is foreclosed on you will not be able to get a loan to buy another home for five to six years. With a short sale in most cases you will be able to buy another property in two to three years. In either event your credit scores are going to take a hit but a short sale is generally the lesser of two evils.

Some of the statistics that have been bandied about are pretty scary and unfortunately are an indicator that Real Estate values are more than likely not going to be headed up for quite a while.

By the end of 2011, approximately 48 percent of the 50 million mortgage loans nationwide are predicted to be underwater or valued less than the money owed on them. There are also published estimates that more than 11 million American homeowners are underwater and predictions are that the number could more than double in the next 18 months!

It begs the question on whether or not holding a buyer out of obtaining a Real Estate loan for seven years would help the housing markets around the country?

One of the driving forces for a Real Estate recovery is going to boil down to simple economics of supply and demand. Home ownership needs to be more affordable to more people. We will not see a full fledged recovery without the buyers to support it.

Given the fact that Fannie Mae is going to seriously crack down on strategic foreclosures, looking at short selling your home could be a more logical solution.

The only conundrum when looking at a strategic default vs a short sale is whether or not the lender will let you complete one. In many situations lenders will not let you short sale your home unless you have a financial hardship. In my experience, I have seen quite a few lenders that are not enforcing the hardship qualifications aspect of a short sale as you would expect. Is it harder to get a short sale done without a hardship? It certainly is but not impossible.

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