Q&A: Lenders Fight Back on Strategic Defaults

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Q: I know you’ve written about people who walk away from their mortgages before. But what I’m not clear about is how that impacts your ability to get a new home loan? Couldn’t you just get financing for a new home before you walk away, and then walk away with a new mortgage and a new home? — N. Cochran, Sarasota, Fla.

A: Of course, as long as your mortgage payments and your credit are in decent standing, you’re eligible to apply for a new home loan. In fact, people do it all the time with second homes and investment properties.

But what you’re suggesting has its challenges.

First, if you apply for a new home loan, and have missed a current mortgage payment or two (as many strategic defaulters do), you’re going to have big problems. Lenders have really tightened credit and one of the biggest objections they have to granting new mortgage loans is to give them to borrowers who have a recent history of missing mortgage payments.

Short of declaring bankruptcy, missing a mortgage payment is one of the biggest mistakes associated with applying for a new mortgage loan.

Then there’s the limited credit pool for people who are “caught” walking away from their mortgages. Fannie Mae (Stock Quote: FNM), for example, has a new rule that blocks borrowers who walk away from their mortgages (but who still had the ability to pay) from getting a Fannie Mae-backed mortgage for seven years after the house enters into foreclosure.

Possibly worse, if you’re tied up in a Fannie Mae mortgage loan and you walk away from it — the old “leave the keys in the mailbox” approach — you’ll be walking away with a target on your back. Fannie also has announced plans to take legal action against borrowers who strategically default. Not all states allow mortgage lenders to go after strategic defaulters in so-called “deficiency judgments,” so you’ll have to ask your state’s consumer affairs office — or a good lawyer — what your options are in that case.

Plus, if you walk away from your mortgage, that hurts your neighbors. In a white paper on the topic, Freddie Mac’s (Stock Quote: FRE)  Don Bisenius, the mortgage lender’s single-family home business vice president, says that communities pay a heavy price when homeowners take a hike.

When strategic defaults occur, homes go into foreclosure and sit vacant for some period of time. We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood. Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. Get a critical mass of strategic defaults, and broader communities and regions become affected. Indeed, Economy.com, the analytic firm, recently said that more strategic defaults could tip a fragile housing market back into one of further price declines. Even more families harmed.

Plus, we haven’t even broached the 500-lb. gorilla — what a strategic default does to your credit rating. BankingMyWay has a good volume of data on the subject — check out our articles on credit damage on mortgage loan defaults, and what often can lead to home defaults.

Increasingly these days, it seems that lenders are fighting back harder against strategic defaulters. It’s likely in your best interest to keep things above board, make every effort to pay, and keep the keys out of the mailbox.

Says Terence Edwards, executive vice president for credit portfolio management at Fannie Mae, “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.”

That seems to be the prevailing attitude among lenders going forward. So, a word to the wise, that strategic default option isn’t looking as good as it was six months ago.

That’s so even if you do go out and “double the fun” with another home loan on a new house before you leave those keys in the mailbox.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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