Strategic Default | Not a Good Idea? (or "Damned if You Do…")
So you find yourself in a none-too-fun position: your home’s value is less than the balance on your mortgage. You are still able to make the monthly mortgage payments, but you simply want – or NEED – to get out from underneath this bad/financially “upside down” situation…
From this Bloomberg article on strategic defaulting, Morgan Stanley estimates that 12% of the mortgage defaults in February 2010 were what are known as “strategic defaults.” These are situations where people simply decided to walk away from their mortgage obligation without making any reasonable effort to modify or otherwise restructure their loan, but still have the financial ability to pay the monthly mortgage.
Now, Fannie Mae, the mortgage guarantor of nearly half of the $10.7 trillion U.S. mortgage market, is dropping the hammer on these “strategic defaulters.”
Seven Years
Fannie Mae recently indicated that they will refuse new mortgages for strategic defaulters for seven years from the date of default.
From the Fannie Mae press release:
WASHINGTON, DC Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. 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. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.
“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management. “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. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”
What Does It All Mean?
Mike Konczal, a fellow at the Roosevelt Institute and former financial engineer, has a seriously great analysis about the Fannie Mae initiative. The short of it, for anyone considering a strategic default, is that there really isn’t a simple, straightforward answer. Nor is there a simple solution, either.
If you decide to strategically default on your current mortgage, you will likely be barred for seven years from obtaining a new mortgage. Not a fun position to be in, but that’s the current real estate reality. The other option is to stay in your home and continue to make those payments.
But how long would it take for you to get your home’s equity back to even?
Mike’s blog has an analysis that shows that to get your home’s equity back to even will likely take eight to twelve years…
So, truly, “Damned if you do, and damned if you don’t.”
If you’ve got questions about your current housing situation, give us a call or simply click the “What’s my home worth,” button below, drop your information, and one of our agents will be in touch with you.
