Friday, October 25, 2013

Strategic Defaults Aren't Worth the Trouble?

Have you been thinking about a strategic default?  Do you currently have a mortgage that’s owned by Fannie Mae or Freddie Mac?  According to a recent article in the Chicago Tribune, Fannie and Freddie are starting to get serious about homeowners who have the money to make their monthly loans payments but decide to walk away from their mortgages.  Since the housing crash, homeowners have been electing to walk away from mortgages in which they owe more than the house’s current market value.  As a result, the homes go through the foreclosure process and are sold at auction.  However, foreclosure sales often don’t generate enough money to cover the homeowner’s loan balance, and they can be liable for the remaining amount in a deficiency judgment.
What Exactly is a Strategic Default?
You might have heard the term “strategic default” since the collapse of the housing market.  In short, it’s a situation where a borrower decides to stop making payments on his or her loan.  While strategic defaults can occur during any economic period, they’ve been numerous in the last five years.  The housing crash caused the market value of homes across the country to drop dramatically, leaving mortgage borrowers in situations where they owed a lot more money on their home loan than their house was even likely to garner on the market.  In other words, homeowners owed more on their loans than the market value of their property.  As a result, many of these borrowers began to simply walk away from the property, allowing it to go into foreclosure—a “strategic default.”
However, this is a big problem for Illinois homeowners.  Specifically, what happens to a borrower when his property sells for less than what he owes on his loan?  As you might imagine, the lender can be out thousands of dollars in these situations.  Depending on which state you’re in, lenders may be able to go after a borrower for additional funds that the lender can’t get back in a foreclosure sale.  In Illinois, lenders can legally go after homeowners for deficiency judgments when the foreclosure sale garners less money than what the borrower owes on the loan.
Fannie and Freddie Haven’t Held Defaulters Accountable
Recently, data has shown that Fannie and Freddie have been generating significant profits.  However, these “government-sponsored enterprises” historically haven’t taken substantial efforts to hold defaulters liable for the money they owe on their mortgages.  According to the article in the Chicago Tribune, Fannie and Freddie “haven’t done a particularly good job at pursuing deficiency judgments,” and the Office of the Inspector General at the Federal Housing Finance Agency (FHFA) isn’t happy about this.
According to the FHFA, they’re going to ensure that Fannie and Freddie “clean up their acts.”  What does this mean for consumers?  In short, if you’re considering a strategic default on a Fannie or Freddie loan, it means that those government-sponsored enterprises are going to go after you.  The Chicago Tribune explained that “going after strategic defaulters is big money.”  Indeed, Freddie Mac has lost out on nearly $4.6 billion from deficiency judgments since 2008.  While Freddie might not have been able to recover the entire amount (given that many homeowners actually had no money left to make their mortgage payments), the problem is that Freddie didn’t even consider trying to recover those funds.
If you think those numbers are staggering, Fannie Mae is even worse.  By the end of 2012, Fannie owned at least 105,000 foreclosed properties, which had then been valued at $9.5 billion.  The key for deficiency recoveries is acting quickly.  States that allow lenders to pursue deficiency recoveries—including Illinois—have specific time windows in which those lenders are allowed to go after the money.
Now, FHFA is new requirements for Fannie and Freddie that will “manage their deficiency collection process,” ensuring that strategic defaulters aren’t simply allowed to walk away from a loan.  If you have questions about how the FHFA’s rules and policies are likely to affect you, contact the licensed Illinois foreclosure defense lawyers at the Emerson Law Firm to discuss your case.
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