By: Lauren Timmerman, Esq.
The Wright Firm, L.L.P.
One of the most talked about topics in the area of mortgage default is the issue of “strategic defaults.” A strategic default occurs when a homeowner is able to pay his or her mortgage, but chooses to stop paying it and allows the home to go into foreclosure. A traditional default occurs when a homeowner can’t pay his or her mortgage, can’t work out any other options with the mortgage company, and is forced into foreclosure.
The number of strategic mortgage defaults is steadily rising. According to the Wall Street Journal, current studies show that as many as 12 percent of current mortgage defaults are strategic defaults. The most common reasons for strategic defaults are that the homeowner decides it’s a better plan, economically, to walk away from a home that’s valued significantly lower than what’s owed on the home (the homeowner is “underwater” on the home), or the homeowner knows that in the current real estate market he or she can buy a similar home in the same neighborhood for much less than what’s owed on his or her current home. Current statistics show that approximately one out of four homeowners is “underwater” on his or her home — he or she owes more on the house than what the house is worth.
Mortgage default, whether strategic or not, has significant negative effects on one’s credit, with the resulting foreclosure staying on one’s credit report for at least seven years. Those homeowners who engage in strategic default may feel the economic benefits outweigh the negative impact to their credit scores. Traditionally, people who had experienced a foreclosure had to wait five years from the date of their prior foreclosure to be considered for a new government-backed mortgage through Fannie Mae or Freddie Mac. This requirement has changed, however, due to the rise in strategic defaults.
Fannie Mae recently implemented new rules that are much tougher on homeowners who strategically default as opposed to homeowners who face traditional foreclosure. Fannie Mae will now make homeowners who went through a strategic default or foreclosure wait seven years from the date of foreclosure to be considered for a new government-backed mortgage, while those homeowners who can show they made a good-faith effort to repay their loan or work out an alternative arrangement (loan modification, deed in lieu of foreclosure, etc.) with their lender but still suffered foreclosure will only have to wait three years to be considered for a new government-backed mortgage. If those homeowners completed a short sale or deed in lieu of foreclosure to avoid foreclosure, then they only have to wait two years to be considered for a new mortgage.
Fannie Mae has also promised to ramp up its litigation efforts and sue those homeowners who have strategically defaulted for the balance left on the mortgage once the home has been sold at a foreclosure sale (“deficiency”), in states that allow for recovery of that deficiency. Industry experts have opined that Fannie Mae is trying to prevent strategic defaults from becoming socially acceptable, as strategic defaults can harm the value of neighboring homes and slow the recovery of real estate values across the country.
Fannie Mae’s recent announcement of these new rules and policies caused much debate in the legal and financial community, with some experts coming out in support of strategic default and others supporting Fannie Mae in its tougher policies. Fannie Mae spokespeople maintain that the tougher rules are an effort to encourage homeowners to work with their mortgage lenders to find an alternative solution to foreclosure.
Dealing with mortgage default and making the decision to walk away from one’s home, whether voluntarily or involuntarily, is never easy. As always, consumers with questions about mortgage default and its possible effects should consult a licensed attorney in their state.
Lauren Timmerman is an associate with the firm, with a primary practice in bankruptcy. She graduated magna cum laude with a bachelor of arts from Wayne State University in Detroit, Michigan, where she was a member of Phi Beta Kappa, Golden Key Honor Society and Phi Eta Sigma Honor Society. Lauren then continued on at Wayne State to receive her law degree. During law school, she served as managing editor of the Journal of Law in Society and won numerous awards for brief writing and oral argument in moot court competitions.
After receiving her Juris Doctor, Lauren worked with the firm of Deloitte & Touche, LLP, advising large-scale corporate clients and high-net-worth individuals on tax and financial issues, including financial planning proposals and reviewing corporate, trust and individual tax returns. She then moved to the firm of Hammerschmidt, Stickradt & Associates, PLLC, where she primarily practiced in bankruptcy. She continued her focus on bankruptcy cases in her work at Marrs & Terry, PLLC, where she managed satellite offices in addition to her representation of debtor and creditor clients. Lauren also served as a managing attorney in bankruptcy at Schneiderman & Sherman, PC, where she managed creditor-based bankruptcy and loss mitigation practices for nationwide clients.
Lauren is a member of the State Bar of Michigan, and is admitted to practice in the U.S. District Courts for the Eastern District of Michigan, the Western District of Michigan, The Eastern District of Texas and the Northern District of Texas. Lauren is not yet admitted to the State Bar of Texas. Her admission to the State Bar of Texas is pending.