(LoanSafe.org) – Fannie Mae has announced that new mortgages will not be backed for 7 years if the borrower has walked away from a mortgage in the past even though he or she would have been able to afford the monthly payments or even though he or she would have been able to find a good faith alternative by communicating with the lender.
Even more so, they will also be suing strategic defaulters in states where such approaches are allowed in order to recoup the losses they had to deal with as a result of the fact that certain people have decided to walk away even though they had other options.
While this statement seems hypocritical especially given the fact that it comes from Fannie Mae, this much is certain: more and more people are becoming financially irresponsible and this problem is affecting individuals as well as communities as a whole.
In some cases, walking away is the only solution. If, for example, both members of a household have lost their jobs and are incapable of keeping up with their monthly payments, the options are unfortunately not unlimited and in a lot of cases, such people will end up having to file for bankruptcy as a last resort.
But with the worldwide crisis as well as the real estate downturn which have affected the US, a new type of borrower has appeared on a large scale: the strategic defaulter. Let’s analyze the following situation for a moment. Let’s assume that you have bought a $500,000 home with a 5% down payment in 2008 and that in 2010, it is barely worth $250,000.
You don’t have to be an expert in order to determine that this is a situation that nobody wants to be in but it’s how things stand for thousands upon thousands of borrowers in 2010. Let’s take things one step further and assume that while both household members are still employed, one of them had to accept a 30% pay cut and the other person had to accept a pay cut of 15%.
Was buying the $500,000 a decision which proved to be a mistake? Yes.
Are the borrowers doing worse financially than in 2008? Yes.
Can they still afford to make the monthly payments? Yes!
This scenario describes the one of the most obvious situations when being a strategic defaulter seems tempting. A financially responsible person would probably acknowledge the fact that buying a home during what was obviously a boom was a mistake but that it’s not the lender’s fault that he or she has bought a home. As a response, the responsible thing to do would be doing everything humanly possible to pay off all forms of debt.
A person who is let’s say less than financially responsible might simply choose to walk away and start from scratch! This is exactly the type of behavior that Fannie Mae wants to discourage by making it next to impossible for a strategic defaulter to secure a new home loan over a period of 7 years.
At this point, politicians have to make an extremely complicated decision. Pretty much everyone can agree that things are starting to get out of hand and that something has to be done. Maybe something not as harsh as Fannie Mae’s suggestions, but some sort of “punishment” needs to exist nonetheless.
The problems start appearing once elections start being taken into consideration. By passing restrictive bills, you would be doing something which responsible borrowers will appreciate but at the same time, you would be upsetting borrowers who are currently not doing well financially. It’s all a matter of political as well as economical risk vs. reward at this point.
As a conclusion, it should be clear that lenders and borrowers need to meet somewhere in the middle. Lenders are not real estate agents and as a result, they do not want to be stuck with properties which they would need to sell at a considerable loss (since they have to manage a lot of properties, they will not be able to dedicate enough time to each sale in order to secure a decent price). On the other hand, borrowers are not doing as good financially as let’s say two or three years ago and for a lot of people, keeping up with their monthly payments is simply not the best financial decision. While Fannie Mae’s credibility can sometimes be doubted, they definitely have a point in this case.