An effort to stem strategic foreclosures

Turn on the TV or surf the web and you’ll learn about home owners walking away from their homes because they can’t afford it anymore, are underwater on the mortgage, lost their job, or all of the above.

This strategy might appeal to an individual home owner in this situation, but it continues to hurt the property values and borrowing power of those who continue to make their monthly mortgage payments on time. This has gone on for so long now, it seemed nothing could be done to prevent it. Until now…

Fannie Mae recently announced (and I assume Freddie Mac will follow soon with a similar announcement) that “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.”

That is a great start, but someone considering walking away probably isn’t thinking about not being able to own a home for seven years. That may be why this next part was added – “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.”

Now this is where it gets interesting. If the home is owned in a state that does allow deficiency judgements, and the home owner chooses to walk away without selling the home OR have the bank agree to a short sale, they are exposing themselves to a potential lawsuit where Fannie Mae will seek to recoup the remaining mortgage balance.

How will this be implemented? No one really knows for sure because the policy was recently announced, but at least it is something to make home owners think twice before strategically walking away.

Until this trend is stopped, home owners making on-time monthly mortgage payments will continue to be the ones who really suffer from the walking away strategy – not to mention its affects on the mortgage industry, real estate sales, the economy, and the economic recovery. If it isn’t obvious by now, all of this is interconnected.

While this action won’t completely stop home owners from strategically walking away, it is definitely a step in the right direction to try and prevent it from continuing.

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