FHA may tag Strategic Defaulters with Scarlet S for life

Okay, foreclosures are up 95% this year in Palatine, the town where I live.

The high foreclosure rate in Palatine is because there are a lot of condos here. Many condos were purchased around or after the peak in June 2006.

I would bet that more than half of those condo foreclosures were “strategic defaults” meaning the buyer could continue paying, but chose to walk away from the property. In talking with clients it’s clear that no one defaults on their mortgage without a lot of thought, lack of sleep and anxiety. People care about their property and their credit rating and don’t just decide to descend into a foreclosure for the fun of it.

The lending industry is pressuring Congress now to discipline homeowner’s who have committed the sin of strategic default by limiting their ability to get a mortgage in the future. This excellent post by attorney Steve Beebe explains that Fannie Mae is trying to prohibit those who walked away from their home from getting a new mortgage for 7 years.

Worse yet, a new law being proposed and already passed by the House, called the FHA Reform Act, would prohibit strategic defaulters from getting any FHA mortgage in the future. Most homeowners who go through a foreclosure try to get an FHA mortgage two to five years after their foreclosure because FHAs have a low 3.5% downpayment and relaxed credit requirements of around 640 FICO.

It’s absolutely insane to ban people for life from getting an FHA mortgage.

First, how does one define strategic default? I don’t think lenders should be allowed to decide which unworthy Hester Prynnes get tagged with the scarlet “S” for strategic defaulter.

Second, the government, other than the tax credits that just expired, has done nothing to help the homeowners in or near default. The HAMP loan modification program is considered a joke and a failure.

This is really all about lenders trying to quell the non-stop wave of foreclosures by intimidating current mortgage holders into keeping, and not defaulting on, their homes, many of which are worth far less than the mortgage amount.

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