According to the Wall Street Journal, Fannie Mae has a new plan to prevent strategic defaults. Strategic default is a bit different from strategic foreclosure. In a strategic foreclosure, homeowners in underwater mortgages can seek remedies like deed-in-lieu of foreclosure, consent foreclosure, or a short sale. A strategic default is simply walking away from the mortgage.
From a financial perspective, strategic default may expose you to a deficiency judgment once the house is sold at a sheriff's sale. Generally, homes don't sell for the value of the mortgage. Borrowers are liable for the difference between the value of the loan and the sale price of the house. Many of the strategic foreclosure options protect borrowers from deficiency judgments.
If that wasn't enough, the new plan from Fannie Mae aims to provide strong deterrents against walking away from an underwater mortgage. After the jump, I break down the new "time out" periods for borrowers who engage in a strategic foreclosure or default.
- If you obtain a deed-in-lieu of foreclosure, you must wait two years (with 20% down on the new home purchase) or four years if you only have 10% down.
- There are apparently no guidelines for a consent foreclosure, but I would imagine they are the same as those for a deed-in-lieu
- Pre-foreclosure and short sales are the same -- two years with 20% down and four years with 10% down.
- Strategic Defaults will have to wait seven years before being eligible.
Clearly, Fannie is trying to prevent more strategic defaults. Given the vast number of bank-owned properties, adding more to the mix will further depress the housing market. However, with few options for borrowers seeking loan modifications, strategic foreclosure and strategic default may continue to be attractive options for the 25% of homeowners who are currently underwater.
