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Crackdown! Is The Massive Wave Of Strategic Defaults About To Come To A Screeching Halt?

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As housing prices have plummeted over the last several years, an increasing number of U.S. homeowners have suddenly found themselves with home loans that are much larger than what their homes are now worth.  So a large number of them have opted for what is known as a “strategic default” – they have simply walked away from their homes and have let the banks take them back.  Many Americans simply decided that it was not a part of their “American Dream” to pay off a loan that is for two to three times what a house is actually worth.  Over the last several years, strategic defaults have enabled more than a million Americans to get out from under crippling mortgages.  But now, Fannie Mae has announced a massive nationwide crackdown on strategic defaults.  Fannie Mae says that it will be closely examining the mortgage data to determine who is strategically defaulting and who is not, and they are going to be “going after” those who they believe have committed strategic defaults.

So what can Fannie Mae do to those who have committed strategic defaults?

Well, the truth is that mortgage laws vary widely from state to state.  But in areas where they are permitted, Fannie Mae plans to pursue deficiency judgments.  A deficiency judgment is a court order that requires a defaulting borrower to pay the entire remaining unpaid portion of the mortgage after a foreclosed home is sold.

In addition, Fannie Mae says that it will also seek all costs associated with getting a house back on the market.

Not only that, but Fannie Mae also says that those who have committed strategic defaults will not be able to obtain another Fannie Mae-backed mortgage for at least seven years after the strategic default.

And that threat has some real teeth to it, because there aren’t too many places where you can get a home loan these days.  In fact, mortgages bought or backed by Fannie Mae, Freddie Mac or the Federal Housing Administration accounted for 95% of all new U.S. home loans last year.

Freddie Mac already “blacklists” strategic defaulters for five years, and it has announced that it will study what Fannie Mae has done and will “consider additional changes to our polices as needed to responsibly manage risks.”

The Federal Housing Administration is cracking down too.  Legislation currently pending in the U.S. Congress would impose a lifetime ban on FHA loans to strategic defaulters.

So for those who have committed strategic defaults or who are considering strategic defaults, the message is clear….

The party is over.

Can you imagine walking away from a mortgage only to have Fannie Mae come after you for $250,000 a couple years later?

There are a lot of people out there who are going to be in for a rude wake up call.

So just how many people have done strategic defaults?

Well, in the past year it is estimated that at least a million Americans who could have afforded to stay in their homes chose to walk away.

And the number of those choosing to strategically default seems to be growing.

In fact, 31 percent of all U.S. foreclosures in March were identified as strategic defaults by researchers at the University of Chicago and Northwestern University.  That was up significantly from just 22 percent in March 2009.

And with approximately 24% of all homes with mortgages in the U.S. underwater as of the end of 2009, there is the potential for millions more Americans to engage in strategic defaults.

But the reality is that this wave of strategic defaults has absolutely devastated mortgage companies like Fannie Mae and Freddie Mac.

In the first quarter of 2010, Fannie Mae and Freddie Mac saw about 1,000 foreclosures a day, which is one about every 90 seconds.

This gigantic mountain of foreclosures has turned Fannie Mae and Freddie Mac into financial black holes that the U.S. government has to continually pour money into.

The Congressional Budget Office is now projecting that the final bill for the bailouts of Fannie Mae and Freddie Mac could be as high as $389 billion.

But that projection may turn out to be quite conservative.

Other analysts are warning that the cost of bailing out Fannie Mae and Freddie Mac could reach as high as $1 trillion.

1 trillion dollars?

Talk about a bailout!

But that is where the U.S. mortgage industry is at.

It is a complete and total mess.

That is why Fannie Mae has decided to crack down on strategic defaults.

Something had to be done to stop the bleeding.

But for homeowners that had been viewing a strategic default as a potential way out of a bad financial mess, this is really, really bad news.

The Beginning Of The End - The New Novel About The Future Of America By Michael T. Snyder

  • The III

    My,my,my. Hey Fannie and Freddie your threats are falling on deaf ears. Don’t you know you will not be around in 5 years. Your broke, bankrupt, finished. What hypocrites! You screw the American people with your ponzi scam and now cry foul when it blows up in your face. The attitude of we screwed you and your going to pay regardless is not going to fly. The American people have spoken! “We’re mad as hell and we are not going to take it anymore”. So don’t go away mad, just go away.

    The III

  • So you default, then you rent for 5-7 years. Is that such a big penalty compared to losing $100K or $200K (or whatever the case may be) on a home that has declined in value?

    Of course, a lifetime ban would be more significant. But if Fannie and Freddie go bankrupt (and it’s likely they will), you’ll never be getting a home loan from them again anyway — no matter if you strategic default or not!

    As I read this, I get the feeling that the correction in home prices may be even bigger than we expect. With people walking away from loans… easy money drying up… and the government blacklisting strategic defaulters… we could very well see home prices plummet.

    -SJ

  • Voltron

    Ok, so FNM or FRE get a deficiency judgement, and the former homeowner will just declare bankruptcy.

  • I wonder HOW FNMA is going to determine who walked from their home while they COULD afford to pay the mortgage.

    As the article mentions, whether FNMA CAN get a deficiency judgment depends on STATE law and it looks to me like they’re trying to scare the HONEST people who don’t have enough money to pay competent lawyers for legal advice. FNMA is targeting people who can make their mortgage payments as long as they don’t plan on taking a vacation any time soon, cancel the kid’s music lessons, etc.

    If you really ARE well off and default only because you don’t feel like paying back $700,000 for a $400,000 home (PLUS the interest!), it’s highly unlikely that you’ll need FNMA for your next mortgage. Simple put the next house in a friend’s or relative’s name or have your corporation buy it. There are a gazillion ways to purchase real estate without putting it in your name.

    If only 50% of the people who are (near) judgment-proof walked away from their over-mortgaged homes and unsecured credit card debt, we could bring this corrupt system down.

    Vote with your money!

    12/07/07: My open Letter to WaMu re. my refusal to pay my $8,000 WaMu (Providian) VISA card due to the 26% interest rate

    http://mylitigation.net/pr/news/release/open_letter_to_wamu_my_refusal_to_pay_my_8000_wamu_providian_visa_card/

    One of the best decisions I ever made.

    Christine Baker

  • Gary

    Strategic defaults happen all the time in commercial real estate. Whats the big deal if people simply do what corporations have been doing all along? After all if corporations are the same as people then people are the same as corporations. I do not see what the issue is. This is what the horrible capitalist system has wrought. I say let the courts cram down peoples mortgages. This also happens in commercial real estate.

  • daveco

    There is a big picture here that I think everyone is missing.

    A home is never worth more than it would cost to rebuild it. But it is also never worth less than it would cost to build it with age correction, ie lifetime of a home does reqiure some maintenance and it does eventually need updates and need to be rebuilt.

    With that being said every region is different.

    But owning more homes than I care to admit and buying them in the last two years here is what is evident in my region.

    1. You can buy 3 bedroom homes nice nieghborhoods for less than a car.
    2. You can rent these same homes for more than two car payments.
    3. Prices are still going down.
    4. You can not rebuild these homes for 5 times what you buy them for, even if you got the property for free.
    5. The reason there are more homes for sale than people wanting to buy them is simple, no jobs.

    The answer to this whole mess is just as simple.

    Jobs.

    The answer to more jobs is simple. Legislation that does not allow outsourcing. The answer to legislation that does not allow outsourcing is just as simple.

    America can not trade with any countries that do not abide by or wage laws. Why do we have a minimum wage law in the US to protect workers if we allow entire countries to help corporations go around the minimum wage!

    It is because we are stupid and do not know how to vote!

    And before the idiots on this web site comment about free trade a few facts. Our biggest trading partner is Canada NOT China and Canada has a HIGHER minimum wage than the US! All of the EU Union has a higher minimum wage than the US! We do not need corporations using slave labor in CHINA and INDIA and other places!

    WE NEED JOBS!

  • daveco

    And before people misrepresent what I said.

    China and India are not the problem.

    It really is wall street and all the IDIOTS in the US allowing there 401k money to be used in the stock market to finance obscene growth in China and India by corporations to utilize slave and almost slave labor in China and India to get around US wage laws and environmental laws and litigation laws.

    The real ponzi scheme is in the corporations. It is not in the housing market. 100 people commit $100/month into a 401k international fund and the fund will borrow $10,000,000 from a US bank to finance a factory in China and India to replace the same 100 idiots in the US who put there 401k in the hands of wall street. Multiply that by 10 million US idiots and you get trillions loaned to corporations who steal everything not nailed down in the US to build OBSCENE factories in India and China. But the problem is they can not pay the loans back because Americans and the world can not buy all that stuff!

    So banks go under and claim it is all because of foreclosures. The reality is on homes as long as over 50% pay the banks make money. Ask any loan shark how that works. But it is simple the banks borrow the money from the fed for almost 0% and then get over 5% on normal loans and around 10% on sub prime.

    But the corporate loans are different, corporations are not paying at all and are leveraged at 100 to 1.

    That is why the banks are losing money, on loans to corporations and states for that matter but not on homes!

  • Hopium

    Hahahaha good luck with that….Ever hear that old saying ” you can’t get blood from a stone “? Oh whats that lol Deficiency judgment again hahaha good luck with that…See you under the table Fannie. If you are planning a strategic default, gather up as much cash as possible, and vanish from the radar. Simple really.

    The Government as well as the American Dopes think and act as if the USA is the only place on the plant to live and survive…trust me America has become a **** hole…Picked to the bone by the electorate and thieving politicians…Nothing is left, and nothing worth losing an ounce of sleep over that is for dam sure. The world is an awful big place and there are much more beautiful places to live than America. So gather up as much cash as you can, and move abroad…your quality of life will improve 10 fold.

  • Jim

    Don’t forget if you default on an upside mortgage you get hit with taxes on the difference. Many folks are in for a rude awakening thinking they could buy something they couldn’t afford and just walk away.

  • Hopium

    Don’t forget if you default on an upside mortgage you get hit with taxes on the difference. Many folks are in for a rude awakening thinking they could buy something they couldn’t afford and just walk away.

    ——————–

    Umm no…if it was real estate you do not pay the taxes…congress fixed that in 09.

  • Jim is working for FNMA? There are several ways to avoid having to pay taxes and again, only the working people with not enough money for competent legal and tax advice will be scared by the threat of taxes.

    The Mortgage Forgiveness Debt Relief Act and Debt Cancellation:

    http://www.irs.gov/individuals/article/0,,id=179414,00.html

    The bankers’ minions are spreading disinformation — get the facts!

    Christine Baker

  • Mark

    No one will buy a home in the future if everybody fears being prosecuted for defaulting. Prosecutions will therefore put the last nail in the coffin of the housing market for a very long time.

  • Dwight

    Most all of you are correct with the angles that you speak of. I consider it a blessing. Jobs are a big part of the problem. But you must look at a more sinister issue. The fact the elite corporatists has conspired to use governments through the falacy of freedom to implement free trade with evil countries the world over. They have empowered another great enemy in China by giving them free trade and allowing our companies to move over seas with no tarriffs or penalties. We have many enemies if you look at the ‘game board’, all of them given reason to hate us on purpose. We may be looking at ww3 in the not to distant future. Good luck, help your family and neighbors, pray silently, and hold on to your hats!!

  • Bob

    debtors prisons will be back before the fall. Debtors are now being pickd up and put in jail for small stuff. Amazing foresight on the part of congress and the banks to change bankruptcy laws before the financial mess. Its the students who are really strapped with no real job prospects because they cannot declare bankruptcy on student loans. When ww3 breaks out this fall I can hear them now “lets make a deal” Join the army and we’ll reduce your debt or we have a nic cell for you in our workcamps. Workcamps will support the war efforts. Don’t worry , free medical and food.

  • John Drake

    As a Licensed Private Investigator who had the unfortunate task of actually working for some of the scumbag financial institutions that now cry wolf, I say that turnabout is truly fair play. All I can say is that I’ve seen it all from the inside as well as the out.

    Simply put, the sword has two edges.

    They enticed and hypnotized the sheepfold during the past decade and now react when they wake up.

    Chapter 7, 11, and 13 goeth both ways!

    Amen

  • Ropeium

    What is Fractional Reseve Banking ?

    Real simple…

    It allows Banks to loan out 26 times the amount of physical “Money Reserves” which reside at a particular bank…

    Meaning…If Chase Manhatten Bank has 1 Billion in Cash Reserves in it’s depository…Then it can lend out up to 26 times that amount in loans…

    I.e. Home Loans, Unsecured loans, Commercial loans…..etc

    Get the picture ?

    Now…Let me ask you…

    If only 1 Billion dollars of paper money has been printed to back that initial Fractional Reserve amount of $ held in the Chase Bank….

    Then pray tell me…Who is responsib;e for paying back all of the extra 25 million $ in loans which doesn’t exist ?

    Which hasn’t been printed yet ? or possibly never will….

    Now…Do you understand the meaning of debt ?

  • Ropeium

    Debt = Slavery

    Whether it be through Fractional Reserve Banking or Federal and State Taxation and Regulation of Individuals and Small Buisnesses…(Which make up 87% of the American GDP)

    Get the picture ?

  • nowandagan

    Debt forgiveness would turn the economy around in a heartbeat. Countries do it. It has worked in the past – and it punishes the real criminals. If one politician professes it they will win the next election hands down.
    See: http://whatreallyhappened.com/WRHARTICLES/jubilee.php

  • Aurora

    So the likely outcomes of FM going after deficiency claims=more personal bankruptcies, more property damage/arson, higher taxes, higher interest rates, lower property values and in the end, FM fails anyway.

  • zippythepinhead

    Bob stole my thunder and basically I agree with most of you on here. People who skip out on loans will be hunted down when push comes to shove and shove is right around the corner with the inevitable collapse coming. Most of these people who “walk” on these loans live and work in the same community finding them will be like shooting fish in a barrel. You think you got the banksters? Think again sucker. These people are trillionares who not only tell congress what to do they’ll go after you for fun. How long do you think it would take for your neighbor to turn you in? There’s safety in numbers and if everybody decides to bail then I guess you’ll be ok but that’s a big if.

  • Ted

    Let’s all be clear on what people are doing. They’re NOT abandoning their obligations. They’re fully fulfilling their loan contracts, both legally, and morally.

    Banks don’t loan money out of the goodness of their hearts. They make investments. They loan you money on the condition that if you don’t pay them back, with interest, they get to keep the house. If you miss payments when the house is worth more than you owe, they don’t usually pay you the difference. Walking away is simply the same thing, in reverse. The banks made bad investments. When the borrowers realized that fact, they chose the most rational option under the contract that those banks agreed to.

  • JT

    Tick, tick, tick, tick…. BOOM!!!!!!!! goes the real estate market. Let’s just hope it is over with within a few years and we can get back to some stability.

  • GovKilledRE

    ahh, leave it to government to deliver the KILLING BLOW to the real estate market.

    what little motivation there was to buy a home is now GONE. not to mention most people reading this will pull their capitaal out of the system, eliminate vulnerabilites to being sued, pull their money out of stocks and retirement funds, and bring down wall street at the same time!

    thanks fannie!

  • GovKilledRE

    how exactly do they determine ‘strategic defaults’? so, i guess you might as well default EVERYTHING then.

    really stupid system we live in.

    put a fork in it. it’s done.

  • GovKilledRE

    there is a time limit to most deficiency judgements, then theres the statute of limitations.

    this is a bluff. it will cost them more to prosecute and they will be trying to get blood from a turnip.

  • GovKilledRE

    Jim: good point. if you’ve already paid the taxes on the forgiven debt, then how can they create yet another mortgage to sue you over?

  • YOU PEPOLE DONT GET IT DO YOU THE GOVT OWNS FREDDY AND FRANY AND NOW YOU OWE US THE PEPOLE AND THE GOVT AND THEY WILL COME FOR YOU AND THEY WILL ATT YOUR WAGES AT YOUR JOBS AND NOW U ARE ON THE HOOK AND HAVE NO RIGHT CAUSE U SPENT AND BORROWED MORE THAN U COULD EVER PAY BACK AND THEN JUST WALK AWAY O AND I TRYED TO DUMBE DOWN MY SPELLING FOR USSES THAT DONT GET IT NO MATTER WEAR U GO UR ON THE HOOK THANKS FOR BEING SUCMBAGS

  • O AND JUST REMEMBER YOUR 401KS GONE OVER NIGHT ALL THE NEW BANKING REFORM THAT MY MONEY THE TRUE AMERICANS MONEY AND UNCULE SAM WILL GET IT BACK FOR US TRUST ME

  • bro43

    Davco, protectionism will do nothing to create jobs. Slash the federal workforce by 95% by eliminating all unconstitutional government agencies, repeal all income taxes, eliminate welfare, ss, medicare, etc, stop meddling all over the world, repeal legal tender laws, reinstitute constitutionally mandated coinage, repeal minimum wage laws and start producing again. It’s really that simple, oh wait a minute it really doesn’t sound as simple as we would like to think.

  • bro43

    The key to real change will be in the American (dis)belief in government. Government is a consumer of resources only, never creating any product or enhancing the citizens quality of life. Our trust, or worse empathy, wrt government is what is ailing us.

  • xyloman

    401K’s ??? That’s long gone. Thank god I cashed that dump in.

    I often hear that really funny commercial in my head … it goes …
    ‘time to make the donuts!’ (dunkin’ donuts I believe)

    So how about … ‘time to build the prisons.’

    Thats would be for you and I.