Government Encourages Strategic Default – More Rewards For The Irresponsible

Strategic Default is when a homeowner’s home has depreciated so much that they will never recoup the full loan amount they have on the home when they sell it, even if they wait 30 years. So instead, they decide to walk away from the house and let it go into foreclosure.

One rule that may have prevented many from doing this was that Fannie Mae required an individual to wait at least five years after having a short sell or turning over the deed to the bank before applying for a new home loan.

Not anymore.

Fannie Mae (and probably soon to follow, Freddie Mac and the FHA) now only require a two year waiting period. This encourages people to walk away from homes they owe more on than the home is valued at.

Consider the following from the IHB (italics and bold are mine):

  1. They could save 12 to 36 months worth of housing payments with the amend-pretend-extend dance. (This means living in the house payment-free while the banks drag out the process of taking the house back, or short-selling it which has been taking anywhere from 12-36 months)
  2. After they go through the foreclosure, they could rent for a couple years at a cost less than the previous payment they quit making years ago.
  3. After three years of squatting and two years of inexpensive renting, they could buy a comparable substitute for their former home and pay less for it with money down.
  4. In the end, they would have the same house with a much smaller mortgage and plenty of equity.

Those who acted irresponsibly continue to be rewarded while the rest of us continue to be punished.

One more thing to thank our Government for.

Categories: Housing Market

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