Fannie Mae Strikes Against Strategic Defaults

by Bill Gassett on June 25, 2010 · 25 comments

Fannie Mae Strikes Against Strategic Defaults

Strategic Real Estate Default

You may have heard or read recently about strategic defaults as this topic is all over the news. A strategic default is when a home owner walks away from their mortgage when they are still able to make the payments.

The reason why a home owner would consider a strategic default and just walk away is because the value of their home has dropped substantially below what they owe on their mortgage.

The general feeling amongst those that are using a strategic default is that it will take years for their homes market value to recover. They basically walk away from the property and start fresh.

Fannie Mae the government backed lending giant is putting into place simple measures that will discourage home owners from considering a strategic default. What does Fannie Mae plan to do?

They will begin “locking out”  borrowers from getting new mortgages for seven years! They will also go after strategic defaulters for the money they owe in states where they are allowed to do so.

Those home owners who walk-away and had the ability to pay the mortgage 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.

Fannie Mae stressed that borrowers who make a good faith effort to work with their lender in order to resolve their situation will be eligible for Fannie Mae loans much quicker than those who just walk away.

Obviously the more homes in neighborhoods around the country that become abandoned due to strategic defaults puts further pressure on depressing Real Estate prices. Foreclosures and bank owned homes tend to bring down values of surrounding properties. Traditional home owners end up competing with these bank owned homes when selling their properties.

Some people that are using strategic defaults are doing so because they have become so exasperated at their lenders for not doing more to help them such as a loan modification. Anyone who has ever tried to get a loan modification would probably be the 1st to admit that lenders do not make it easy for a borrower to get one. Often times borrowers can’t get responses from banks to their questions and are repeatedly told to send in the same documents over and over again.

As a Realtor who has been selling Real Estate for the past twenty four years in Massachusetts, I have come across a number of properties where the owner just picked up and left. Often times I wonder why they did not take the necessary steps to try to avoid foreclosure.

It seems there are lots of folks that do not realize there are better alternatives that just bailing on their loan.

Short Sale vs Strategic Default

One alternative that I have been very successful with is helping Massachusetts home owners to short sale their property. In a short sale the lender allows a home owner who owes more than their home is worth to take less than the amount owed at closing.

Short sale success in Massachusetts

The owner of the property benefits in this situation because they get out of a financially difficult situation without going to foreclosure which can seriously damage your credit.

Most of the time when your home is foreclosed on you will not be able to get a loan to buy another home for five to six years. With a short sale in most cases you will be able to buy another property in two to three years. In either event your credit scores are going to take a hit but a short sale is generally the lesser of two evils.

Some of the statistics that have been bandied about are pretty scary and unfortunately are an indicator that Real Estate values are more than likely not going to be headed up for quite a while.

By the end of 2011, approximately 48 percent of the 50 million mortgage loans nationwide are predicted to be underwater or valued less than the money owed on them. There are also published estimates that more than 11 million American homeowners are underwater and predictions are that the number could more than double in the next 18 months!

It begs the question on whether or not holding a buyer out of obtaining a Real Estate loan for seven years would help the housing markets around the country?

One of the driving forces for a Real Estate recovery is going to boil down to simple economics of supply and demand. Home ownership needs to be more affordable to more people. We will not see a full fledged recovery without the buyers to support it.

Given the fact that Fannie Mae is going to seriously crack down on strategic foreclosures, looking at short selling your home could be a more logical solution.

The only conundrum when looking at a strategic default vs a short sale is whether or not the lender will let you complete one. In many situations lenders will not let you short sale your home unless you have a financial hardship. In my experience, I have seen quite a few lenders that are not enforcing the hardship qualifications aspect of a short sale as you would expect. Is it harder to get a short sale done without a hardship? It certainly is but not impossible.

There is certainly lots of things to think about when deciding if a short sale is the right move or not. Over the last three years I have helped numerous home owners in the Metrowest Massachusetts area complete a short sale. Along the way I have written quite a few articles that detail some of the most important considerations when completing one.

If you are considering a Massachusetts short sale I would encourage you to read some of the articles I have put together below.

Short Sale Real Estate articles:

Acceptable short sale hardships

Short sale tax consequences

Short sale debt removal

Questions to ask a short sale listing agent

Picking a top Massachusetts short sale Realtor

If you are needing to complete a  short sale of your home or condo in Ashland, Bellingham, Framingham, Franklin, Grafton, Holliston, Hopedale, Hopkinton, Medway, Mendon, Milford, Southboro, Westboro, Natick, Northboro, Northbridge, Whitinsville, Upton, Uxbridge, Shrewsbury, Worcester, or Douglas Get in touch! I would love to interview for the chance to represent your best interests.

I am successfully completing short sales through out the Metrowest Massachusetts area. So far, knock on wood, I have a 100% success rate for short sale approval!

If you are outside of the Metrowest Massachusetts area and need to do a short sale please feel free to contact me and I would be happy to refer you to a Realtor in your location that handles short sales and knows what they are doing! I have referred short sales to other Realtors all around the country.

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About the author: The above Real Estate information on Fannie Mae strikes against strategic defaults was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 24+ Years.

Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service the following towns in Metrowest MA: Ashland, Bellingham, Blackstone, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northboro, Northbridge, Shrewsbury, Southboro, Sutton, Wayland, Westboro, Whitinsville, Worcester, Upton and Uxbridge MA.

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{ 25 comments… read them below or add one }

Irene Kennedy June 25, 2010 at 1:58 pm

Bill,

Very nice job spelling out the whats and whys of strategic defaults, Bill. Have met with homeowners in just this situation and we’re exploring whether or not their particular mortgage companies will agree to a short sale or loan modification.

Lots of hazards with strategic defaults – Fannie Mae is just one more!

Bill Gassett June 25, 2010 at 2:21 pm

Irene strategic mortgage defaults are such a hot topic right now. There are some interesting arguments on both sides of the fence regarding both the financial and moral issues of just walking away. It will be interesting to see if lenders become even more flexible with letting folks short sale their homes when they are still able to pay their mortgage.

Robert Toloy June 29, 2010 at 6:19 pm

Bill,

I got your link from the Active Rain story on Fannie Mae today by Harry F. D’Elia. I appreciate your comments. You are very dead-on as well. Good job!

It seems that if a homeowner is a Wachovia borrower, a “good faith effort to avoid a strategic default via the short sale game rules route, would be different and the process to a short sale approval is significantly easier, no hardship needed, owner-occupied or investor property (doesn’t matter), no deficiency judgements, even some nice cash incentives at COE. Why can’t Fannie Mae get on-board and announce the same game rules as Wachovia instead of similiar HAFA rules. I’ll bet that if they announced this to the nation, homeowners would jump on, change the upside down properties with current value buyers and we could all reverse the real estate market conditions faster…what do you think? Then Fannie Mae would be happy with all the good faith efforts…hmmmm…

Fred Disick July 29, 2010 at 10:18 pm

Of course you’re going to sway homeowner towards the short sale route. You’re a real estate agent and have a vested interest in homeowners selling their home. You and other real estate agents/brokers make money of selling a home whether it’s a short sale or not. My advice to homeowners considering a strategic default is to talk to an independent real estate attorney. They will give you advice that’s best for your situation and they don’t have any vested interest in what you do. Sometime’s its easier and less damaging to your credit to just cut your losses and walk away.

Bill Gassett July 30, 2010 at 2:49 am

Fred are you serious? “sometime it’s easier and less damaging to your credit to just cut your losses and walk away.” Fred it certainly may be easier but it is in no way less damaging to your credit unless you don’t mind not being able to get another loan for 7 years! Of course I have a vested interest in selling peoples homes – SO WHAT! Do yourself a favor and don’t ever get into the financial counseling business.

Paul Assante July 30, 2010 at 1:32 pm

The fact is HAMP is an abhorrent failure, this is the borrowers way of getting their own loan modification, Banks would do the same thing if placed in our position, so would any prudent investor, its simply a good investment strategy, why lose thousands on an underwater home. Do you need to buy a home every 7 years?

Unfortunately banks view foreclosures as more profitable than loan modifications, due to the failure of Obama’s loan modifications, I know for a fact banks are flipping foreclosures to each other right now for profit, Ex Bank A will foreclose, and sell property to bank B for 60 cents of the dollar. Bank A now has a nice write off, often their losses are compensated by the Govt, Bank B sells the home for a profit and shows a tiny sum for their investors. Banks are holding onto hundreds of thousands of properties in shadow inventory, trickling home onto the market attempting to keep their investment values from crashing. Th only thing that will turn this market around is to have values crash, underwriting is more stringent that ever, rates are at all time lows, we need values to come down another 30%. Banks are seeing that it doesn’t happen, We need forced principle cram downs.

sue August 4, 2010 at 4:02 pm

strategic forclosure is the only way out for me! I don’t want my home (got married he has a home) and can’t get rid of it..I offered it for assumable, rent – you name it. I had an offer on it that would be a short sale and BOA didn’t even want to hear about it, they gave me a number that always said “this number is temporarily unavailable”. They paid me no attention whatsoever. So I quit paying the mortgage. Guess what! Now they call me 2 or 3 times a day, I did talk to them and told them about the number they had given me and the person I talked to said – Now I’ll give you a GOOD number! I’ve had it, the banks make me sick. I’ve talked to lawyers and they advise to let the bank foreclose, I may have to go bankrupt but that’s okay with me…As for feeling guilty – I feel as guilty as the banks do with their bailouts.

Bill Gassett August 5, 2010 at 5:54 pm

Sue – I am sorry to hear about your situation. It is too bad you did not get involved with someone that could have helped you early on with doing a short sale. While I understand walking away may make your feel better because of the treatment you received from Bank of America, in the long run you would have been much better off doing a short sale. I do agree with you about BOA and the run around they give when people call them. Their staff is very poorly trained. In fact they constantly give people misinformation to the point where you wonder if it is on purpose.

Robert Toloy August 16, 2010 at 10:05 pm

Bill,

Very sad regarding “Sue”. She’s absolutely right though. Most of the time when BofA is contacted directly by the distressed homeowner facing a housing-mortgage dilemma, there has been a disconnect of some sort. I’ve talked to homeowners of BAC loans and they say the same thing. But 100% of the time that I have recieved authorization to speak to their lender the process moves towards the end result in its typical fashion. I believe that when the borrowers is removed from the actual process and handled by a realtor, it’s significantly more effective. I just helped a borrower just like “Sue”, married just prior to contacting me, her husband had a home she now lives in, and she decided to short sale her smaller property, which, I did. It was a typical, traditional short sale.

A realtor can discuss the situation without the emotional tie to the property, without the distress that fills the homeowner, and with the proper language that helps to clarify to the lender what needs to be accomplished. On many occasions, homeowners in preforeclosure tell me their stories of when they call the customer service number on their mortgage statements and says “I can’t afford the mortgage payment”, or “I want to do a short sale”, maybe before an attempt to a loan mod was attempted, the service rep on the line may be the one who is not experienced (we know lenders hired many new reps to handle the crush), or is just being human that just spoke to the worst person in the world just prior to taking their call, and so on. So with the short sale solutions that are now becoming prevalent and better understood by the homeowners as a “graceful exit strategy” for them to allow peace of mind of deficiency wipeouts, potential for re-allocation money at COE, and minimizing their creditworthiness “ding”, the method for which homeowners to do a short sale with a realtor, but to initiate it themselves will become that much easier and more significant. My message to homeowners out there is that it is becoming easier and is a better strategy than foreclosure. Hang in there folks! You are not alone! Call a realtor.

Bill Gassett August 17, 2010 at 1:51 am

Robert you are right it is very sad what happens to folks that want to do a short sale or loan mod when they call their lender and get a complete run around. I just met another gentleman today that was looking to do a loan mod through Bank of America and was told by the rep on the phone that it would be a slam dunk.

Nine months later there is no loan mod and guess what the glorified clerk on the line at BOA told him to stop making his mortgage payments while he was trying to get loan modification approval. This sad story ends with another botch job by the lame people that get hired for minimum wages answering the phones at these major lenders.

When dealing with any kind of issues with a lender folks should really hire a pro to help them whether it is a short sale attorney or Realtor.

Sreenivas August 25, 2010 at 9:28 pm

Bill is right. I bought home on 2005 at peak time and is now under the waters. The value of homes went down 45% literally in my community located in city Manassas, VA. I decided to short sale my home and found an agent local who is very good on short sales process. My lender is Bank of America. My short sale is just approved today and entire process took just 3 months.
If you decide you leave home, you need to try Shortsale first. Bank of America is not so fast and you need to have lot of patience. You just need follow procedures, and the process is completely on-line. Find an agent, go short sale, Bank of America.com and initiate the process.
good luck

kelli September 1, 2010 at 8:46 pm

I walked away from my mortgage…bought at the height of the market for 185 with foreclosures in my neighborhood to the tune of 100,000. I tried everything with Wells Fargo. HARP no go because my fannie mae loan was purchased by Citigroup. We did not meet HAMP guidelines because we could make our payment and we were told unless we stopped making payments, they could not look at it. Also, no way we could refi as so far underwater. Also, loan mods no go as we could make our payment and had jobs. We consulted a real estate attorney that said we might break even in our Atlanta zipcode 30032 in up to 10 yrs meanwhile paying out interest only to Wells Fargo the whole time. I think that when we walked, we maybe owned one door in our home after 5 yrs. We had no idea the market would go this way. I now live in a nice neighborhood renting in an excellent school district for my child. It was done as a business decision for my family and I am glad we did it. Obama’s plan is not working for everyone, especially if your loan is not backed by fannie mae or freddie mac!!!

Bill Gassett September 2, 2010 at 3:15 am

Kelli – Sorry to hear about your financial situation. I do not blame you for walking away at all although you could have been better off doing a short sale as it would have had less of an impact on your credit. It is easy to understand why many people are making the decision to walk away from their homes when there is not light at the end of the tunnel. The many foreclosures and short sales have had a tremendous negative effect on many Real Estate markets. I know the Atlanta market has been really hit hard. I wish you and your family the best of luck.

Trish October 2, 2010 at 10:23 pm

Seriously considering making this business decision as well. Everyone makes the assumption that people care about FICO. If you don’t plan to buy another property, and aren’t looking for any new lines of credit, who cares! I’m under water by 15-20% – not to mention that I’ve already put $70k cash into my home with remodeling – so I’m really down closer to 45%. Need a roof and a couple of other infrastructure repairs, and don’t have that kind of cash. Can’t refinance. I’m tired of throwing money into this money pit.

Bill Gassett October 3, 2010 at 11:56 am

Trish I am sorry to hear about your financial position. I guess if you don’t care anything about your credit than it would make a strategic default less painful. Have you thought about future employment? There are some companies that take a persons credit history into consideration when hiring an employee. Best of luck to you.

Vic October 15, 2010 at 9:57 pm

Any suggestions: Currently owe $278K on home valued at $140k…a few neighbors have forclosed, homes up for auction. Wanted to refinance from a 6.25% down to the lower offered rates, Wells Fargo said no. We can afford payments but also realize we will not recover $138 negative equity in the next 10 years to sell when we retire. Many people have told us to walk….I’ve waited 2 years hoping to refinance, I’ve lost hope now. Suggestions? Oh by the way, we can afford our payments

I live in California, loan is a Fannie Mae loan, don’t plan to buy into the so-called American dream of trying to own a home. I’m ok with renting for the next 7-10 years. Banks won’t short-refinance to me, won’t sell the home to me actual market value. I don’t qualify for any of these government programs because I can afford my payments. Really thinking of strategically defaulting beginning next month!

Bill Gassett October 16, 2010 at 6:54 pm

Vic what I would encourage you to do is a strategic short sale and not a strategic foreclosure. You may not be buying a home but your credit will take a serious hit which will mean you will get the highest rates for everything including car loans and credit cards.

Holly November 4, 2010 at 3:14 pm

Our home is underwater, worth 295K, we owe 330K. We contacted the bank about a refinance and for 12K cash at signing we can get a better rate, 4.62% which will save us 18K over the next 30 years. I am disgusted. We have been making our payments on time every month and just getting punished for it. The banks get to borrow money at .2%, why can’t they loan it to homeowners that are responsible, current and underwater at 1% (that is 5x their cost) with 2 points.

The total cost of ownership would be so much reduced that strategic defaults would no longer make sense. This would help the people, help stabilize the market, and free up a lot of cash flow for citizens to spend in the economy. I did the math, our mortgage would go from 1,822 to 944 a month if we could refinance at 1%. Do that for everyone and that will Stimulate the economy without a dime from Uncle Sam.

It could be said it isnt’ fair to the investors, but lets face it, the government bailed out alot of the banks by buying mortgages (5 trillion worth?) and the MBS (1 Trillion?) so cutting their future earnings to preserve the assets held by the taxpayers doesn’t seem all that unreasonable to me.

Bill Gassett November 4, 2010 at 6:20 pm

Holly I agree with you completely! There is a lot about the banking industry and the decisions that they make that I will never understand. Instead of reducing the rate and still making money they would rather foreclosure and lose money. This one the surface makes no sense at all. On many occasions as it turns out the investor makes out better for tax purposes with a foreclosure. The bail out money is also part of the equation as well.

Lori Haugen December 30, 2010 at 11:28 pm

Mr. Gassett
I am a joint tenant in common with another single gal. I have serious health issues and have been out of work for over a yr. now. My soul income is court ordered alimony. We are definitely in a distressed position. WF agreed to a short sale. We had a buyer and the deal was accepted and we were 3 weeks from our closing date and at the deal went south. Our home was off the market for over 3 mos. and the buyer had nothing to lose by walking. No earnest money was collected, which made it easier for him. In the meantime, we had put money down on separate rentals and signed leases, had utility shut of dates and changed addresses for mail. Then nearly 24 hours plus, we had another buyer over Xmas. They wanted acceptance of their offer within 24 hours on Xmas eve. Our Realtors were both out of town and we didn’t have a printer, scanner/fax. Over the holiday while visiting relatives they were counseled to withdraw their offer. So a few days later that deal fell through. Now we are proceeding with moving out. We have a vacancy binder to cover our interest plus we are paid up on all taxes and ins. We are, however, 3 months delinquent on our mortgage. We were counseled to stop paying to facilitate a more probable outcome on the acceptance of short sale by our loan servicer. WF is has been hassling us about the delinquency and checking up on the condition and if it is still our primary residence. Soon it will not be, and even though we are hopeful that it will sell in a short sale, there is a good chance we may run out of time and WF will foreclose. I also will not be able to keep paying utilities for two places. My credit is trashed due to divorce and I don’t think the chances are good that I will recover financially and I soon will be on disability, so I am not concerned about the future implications regarding employment, and I am not in need of a loan. My friend however, has a career as an RN and would like to eventually buy again in the future. We are individually and collectively insolvent and I am not sure of the tax consequences of a foreclosure.
Signed “Running out of Time”

Bill Gassett December 30, 2010 at 11:45 pm

Lori I am sorry to hear about your situation. The one thing I would question right off the bat is why in the world your Realtor did not collect an escrow deposit? That is just plain stupidity and obviously allowed the 1st buyer to walk without any consequences. The whole purpose of having an escrow deposit is to avoid the situation your just went through. Not sure about the 2nd offer and why the buyer was told to withdraw their offer? I wish you the best with your short sale and hope everything works out for the best.

Lori Haugen December 31, 2010 at 6:02 am

Mr. Gassett

Is an “Escrow Deposit” the same as “earnest money”?
The buyer gave a $1,000.00 earnest money payment to be held by a third party. Our Realtor told us that banks usually do not collect the earnest money and it is not given to us as the seller because it is the bank that is the seller and they are the ones that collect any money that is in escrow such as taxes or insurance. We have lost all confidence in our Realtor and believe we have missed our window of opportunity as we have sat by and watched two offers blow up in our face. We are thinking that we are just plain running out of time and the bank will probably make our minds up for us and foreclose, as we have already received word from WF that our only options now, after failing to secure an offer and close a deal that is at FMV, is to do a deed in lieu of foreclosure or foreclosure.

We are now wondering what the repercussions are with a foreclosure. I think that we meet the criteria to be excluded from paying taxes on forgiven debt because;
1) I lost my job 2) I have serious health problems and 3) We are insolvent. I am not sure if our loan/debt is a non-deficient one or not, so it is possible they can’t come after us if the contract states that they will trade the debt for taking possession of the property. I do know that the longer we do not make payments and stay on the market in hopes of a possible short sale the FMV is crashing downward and this will effect the gap that determines insolvency.

Bill Gassett December 31, 2010 at 1:40 pm

Lori – Yes they are one and the same. Unfortunately it sounds like your Realtor is clueless. The LENDER is NOT selling the home YOU are. The only function of the lender at this point is to approve or not the terms YOU present them. The Realtor you are using obviously does not understand short sales at all. My suggestion would be to try to free yourself from this person and find a good attorney to represent you.

One of my biggest pet peeves is Realtors who take listings in an area that they have no competency in. This person is taking your financial future in their hands without proper knowledge to get the job done.

Lori Haugen January 4, 2011 at 4:54 pm

It is becoming more and more clear daily that my Realtor is clueless. With two botched deals behind us, we are trying to move on with our lives. We are releasing our clueless agent and we have moved into our respective apartments that we put money down on. The house will be vacated in two days. We have been advised that there will be t ax implications if the home is not our “Primary Residence”. So if we continue and secure a short sale, we will have tax liabilities. Of course our Realtor is disagreeing and telling us most of his clients are letting their house sit empty. I submit
that they either don’t realize the implications or are willing to accept paying increased taxes rather than effect their credit.

Jim May 28, 2011 at 1:06 am

Just walk away!
Treat it like a business decision.
Maybe it’s an under performing asset. :)

Biggest reason not to do a SS…. possible deficiency judgement.
If you live in a non-deficiency’s state you might want to look into just going the FC route.
If you live in a deficiency state, good luck.
Also keep in mind….. both a SS and FC are going to wreck your credit.
Good Luck.

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