Strategic Default Not an Option with Fannie Mae

June 23, 2010

If you are a homeowner who chooses to walk away from your Fannie Mae mortgage, don’t expect to get another one for seven years.

The government-backed mortgage buyer today unveiled a new policy designed to encourage struggling homeowners who have the means to make mortgage payments to pursue alternatives before settling on foreclosure.

According to Fannie Mae, “Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.”

Alternatives to foreclosure could include a loan modification, short sale or deed-in-lieu of foreclosure.

“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,” said Terence Edwards, executive vice president for credit portfolio management.

Fannie Mae announced it will take legal action to get back the outstanding debt from borrowers who strategically default, which occurs when a homeowner stops making mortgage payments despite being able to.

Strategic defaults are becoming more common since so many homeowners are upside down, which means they owe more on their mortgage than their house is worth. I happen to be one of those people, though I am not a strategic defaulter.

According to researchers from the University of Chicago and Northwestern University, the amount of homeowners willing to default because their mortgage exceeds the value of their house, even though they can afford to make their payments, increased from 22 percent in March 2009 to 31 percent in March 2010.

“With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments,” said Paola Sapienza, professor of finance at the Kellogg School of Management at Northwestern University.

Guess they won’t be able to as easily anymore.

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I read the article you referenced on the dramatic increase in strategic defaults from March 2009 to March 2010 and found the information valuable. Thanks for a very informative post. I doubt I would have found that article if you did not post it here. Great info!


Alan Kroll: Managing Broker
RE/MAX Allegiance – Ashburn, VA


Thanks for reading and for commenting!


People chooses to walk away because their servicers keep pushing them to the edge, and won’t cooperate.

These servicers needs to be punished, somebody needs to teach them a lesson.

Why delay the inevitable? The more you stay in an underwater home the longer you suffer.


And CitiMortgage is known for it.


No… borrowers need to keep their promise to repay the loan. The agreement wasn’t to repay the loan only as long as the investment was good. If you buy stock on margin, you pay it back even if the stocks go down. If you buy a car, you don’t get credit for the depreciation just because you drive it off the lot. If you spend 10k on a patio and pool, you aren’t guaranteed to get it back.

The bottom line is that the borrowers promised to repay the loan and a strategic defaulter has the means… but ‘strategically’ decides not to because they made a bad bet on real estate values (like many of us). I’m under water… but I continue to make the payment because my word is worth something.

Keep in mind, this is different than those of us who’s income has dropped or have lost our jobs. Those aren’t strategic defaults. They ARE defaults, however. The lenders should then look at see what the best options are… but its not to forgive debt. Maybe a temporary forebearence until the income situation is solved because that’s the best for BOTH parties. If the income curtailment is permanent, however, something temporary isn’t going to help and maybe selling the home that can no longer be afforded is the best choice (however unfortunate).


[…] up from 41 percent in May. Men (57 percent) are more likely than women (40 percent) to consider a strategic default to deal with their negative […]


The motivation for a strategic default may depend on how far a borrower is underwater.
Having a mortgage that’s twice as much as the value of a home could be somewhat discouraging. The prospect of being stuck with a losing investment that may not reach a break-even point for 10 years or more may be enough motivation to take a walk.

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