Strategic default: the alternative to waiting
Every decade has words or phrases which engender memories of a bygone era. If one says "Peace and Love," you may be transported to the time of bell-bottom pants and lava lamps, and, perhaps, the psychedelic pops of seeds bursting in a wine-filled bong. Years from now, the first decade of 2000 will probably be brought to mind by expressions such as "too big fail," "underwater- houses," and "strategic default." It is the last one that has found its way into the regular evening news. Besides bankers, it is doubtful any of those phrases will inspire warm and fuzzy feelings. For many Americans, they will describe an era of despair.
Jargon and buzz words often lead to new ones. The latest to bounce around the mortgage industry, "strategic default," has made its way to the ears of members of Congress.
In essence, strategic default occurs when an "underwater" homeowner (home is worth less than its appraised value) decides to walk away from his or hers property without being forced out by eviction. According many accountants and economists, homeowners choosing to breach their agreement with banks are often making a sound decision, although ethics of doing so may cause consternation for those more worried about their obligation to their lender than to their family.
Responding to the increase of self-eviction, in June, GSE Fannie Mae issued a notice warning defaulting borrowers who walked away when they had the capacity to pay, or who did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage for a period of seven years from the day of foreclosure. In addition, Fannie Mae said it will take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments.
Last week, a group of lawmakers, led Rep. John Conyers (D-MI), lashed out at Fannie Mae and called their new policy "opaque, overbroad, and punitive. He went on to add that the secondary mortgage giant was using taxpayer dollars to penalize underwater homeowners, considering Fannie Mae is in conservatorship and is effectively owned by the American public.
A letter was sent to Treasury Secretary Tim Geithner expressing the opinion of some lawmakers: "The policy is one of the many which seems to run counter to the national need to stem the tide of foreclosures which are devastating communities across our nation. The letter expressed further displeasure in saying, "At a time of record deficits and a nation crying for the government to get its finances in order, it is also unclear why Fannie Mae is proposing to use taxpayer dollars to pursue legal judgments against individuals who lose or have lost their homes, have wrecked their credit rating, and likely have little or no remaining monetary assets."