Urgent Legislative Alert The House version of the FHA Reform Act (H.R. 5072)now  Contains a Very Dangerous open ended Draconian  "Strategic Default" Provision

The "Strategic Default" Provision inserted in this bill has potentially very dangerous implications due to its current complete lack of any definition of what constitutes a "Strategic default" was tacked onto the bill at the last minute would make homeowners who "strategically default"  ineligible for an FHA-insured loan in the future.

What is the definition of the Strategic Default" provision of this Bill  that could subject potentially millions of Americans to these extreme life time credit sanctions  ‘(2) STRATEGIC DEFAULT- For purposes of this subsection, the term ‘strategic default' means, with respect to a residential mortgage loan, an intentional default having such characteristics or under such circumstances as the Secretary shall, by regulation, provide.'.

http://www.govtrack.us/congress/billtext.xpd?bill=h111-5072  Cut and paste to your browser to review a copy of FHA Reform Act (H.R. 5072

The rider was introduced by Rep. Chris Lee (R-New York). " The provision passed in a voice vote, without opposition.

It would require when and if passed by the Senate and Signed by the President that the HUD Secretary  devise a strategy for defining and pinpointing "strategic defaulters", and then implement screening procedures to ensure these past foreclosed upon  homeowners are not granted an FHA Backed loan in the future

My concern regarding this provision is that it as currently drafted gives the HUD Secretary virtually no guidance as to congress intent and  the unrestricted power to severely restrict or eliminate future FHA backed financing and the possibility of home ownership for a large group of American citizens for the rest of their lives without any current limitations or definition of what is a "Strategic Default". This provision could potentially negatively impact  millions of Americans who are part of the 25% of the population currently under water on their home loans and looking at a possible foreclosure. Think of the possible social, political and economic implications of this Draconian provision  passed by the House also being approved in the Senate without any specific written guidance, restrictions or definitions from our elected officials.

Am I over reacting?

Please take the time now to read the exact wording of the existing house version of this bill. Ask your self What is the definition of the Strategic Default" provision of this Bill  that could subject potentially millions of Americans to these extreme life time economic sanctions. Answer the Bill does not contain a definition of what Strategic Default means. Then ask your self how will this bill effect the millions of americans who have lost their homes or are potentially facing a default on their mortgage. Possibly your self or your children, your past and future clients. This provision should be labeled the Law of unknown and unintended consequences.

If the home owner had tried to a loan modification and failed would he or she be a  Strategic Defaulter ineligible for an FHA-insured loan in the future. 

If the defaulting home owner had been given a high interest rate variable rate loan on their now upside down home which  increased to the point that they could no longer afford to keep up their payments and keep their children in College and or make their Medical Insurance Premium Payments would that be a "Strategic Default".

If the home owner had tried to do a short sale and the bank would not agree since their loan was covered by PMI or they would not agree upon the value what then?

If the home owner owed $500,000 on a non recourse first loan on their home and its current market value was $200,000 and  tried to do a short sale but the bank would not release without a recourse note. If that home went to foreclosure on the advice of the owners accountant or attorney would that be a Strategic Default" with a life time FHA Credit Ban penalty.

If the lenders holding the foreclosed notes did not make a "good faith effort" to work with the home owner  attempting a loan modification or Short Sale including a principal reduction on a home in a area that might  be under water for the next 20 years. Would that be a "Strategic Default." 

Feel free to use your own imagination to develop a list of all the possible different areas of potential abuse and conflict of interest between  lenders and millions of underwater American home owners facing the potential of future foreclosure on their existing  homes.

 

Let's look to the actual wording of the bill passed out of the house to the senate for guidance to see what it says about these issues and my concerns.

HR 5072 RFS 

1 SEC. 25. PROHIBITION OF MORTGAGE INSURANCE FOR BORROWERS WITH STRATEGIC DEFAULTS.

Section 203 of the National Housing Act (12 U.S.C. 1709), as amended by the preceding provisions of this Act, is further amended by adding at the end the following new subsection:

‘(z) Prohibition of Mortgage Insurance for Borrowers With Strategic Defaults-

 

‘(1) PROHIBITION- The Secretary may not newly insure any mortgage under this title that is secured by a 1- to 4-family dwelling unless the mortgagee has determined, in accordance with such standards and requirements established by the Secretary, that the mortgagor under such mortgage has not previously engaged in any strategic default with respect to any residential mortgage loan.

 

‘(2) STRATEGIC DEFAULT- For purposes of this subsection, the term ‘strategic default' means, with respect to a residential mortgage loan, an intentional default having such characteristics or under such circumstances as the Secretary shall, by regulation, provide.'.

"The FHA reform bill, including the Agency ban on "Strategic Defaulters", has not yet been approved by the Senate.

 The National Association of Realtors needs to move rapidly and strongly be sure that this very dangerous Strategic Default Provision is either dropped from the bill or very carefully defined and restricted in the Senate Version to be sure that the purported intent of this provision is the result we all finally wind up with. 

 

Fred Martin

 
Posted by Fred and Mario Martin on 06/19/2010 09:24 PM   Comments (7)  
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7 Comments on Urgent Legislative Alert The House version of the FHA Reform Act (H.R. 5072)now Contains a Very Dangerous open ended Draconian "Strategic Default" Provision

JUN
19
2010
2 Featured Posts Attended Rain Camp

Very interesting post and perspective.  Thanks for posting!
9:29pm • #1
413,712 Points 88 Featured Posts Localism Sponsor Outside Blog Called Shot Master

This is wonderful news...Get onto CNN Money, or the Washington Post, or the WSJ for better than analysis than calling this "dangerous". "Strategic defaults" -- what we should call "WALKING AWAY" now represent 31% of all foreclosure actions. The purpose of this bill is to tighten future credit -- tighten, not eliminate -- for people who could have afforded to make their mortgage payments BUT CHOSE NOT TO!!!. A government backed loan -- FHA, Fannie and Freddie -- are a tax payer supported programs that we all pay for by backing the loan with government credit. When people default, it raises the cost of credit for everyone else. I'm all for helping out people in truly dire straits -- but why let someone buy a house again until they can demonstrate their credit worthiness again. Credit is a privelege, not a right.
10:01pm • #2
JUN
20
2010

Leslie Read the bill is does not say Tighten future Credit It says eliminate for life. May not insure"In the Future"

It does not say "for people who could have afforded to make their mortgage payments BUT CHOSE NOT TO!!!."

It says we will let you know later what the rules are. 

Defined in the current bill as  "intentional default having such characteristics or

under such circumstances as the Secretary shall, by regulation, provide.''.

Dont rely on what CNN says this legislation says.

 Read the actual legislation as passed out of the house

http://www.govtrack.us/congress/billtext.xpd?bill=h111-5072
12:28am • #3
413,712 Points 88 Featured Posts Localism Sponsor Outside Blog Called Shot Master

 This legislation is intended to restrict people who did "strategic defaults" from getting government-backed loans in the future. Fannie, Freddie and FHA government supported loan programs are supported by tax payers -- you and me!

Optional defaults drive down values in neighborhoods and raise the cost of credit. If my neighbor bails out -- just because he can -- and that house sits vacant and then sells at a discount, I have lost the years of equity I have built up, one payment at a time. What would I do if I needed to sell -- needed, for health reasons or dire economic straits? I can't think of anything more unfair than me supporting the lifestyle of someone who optionally walks away from a financial commitment.

If your kids asked you to co-sign on a car loan and didn't make the payments, and the car was re-possesed, would you jump to co-sign again? If someone has a poor driving record, shouldn't he pay higher insurance than the careful driver?

People who "strategic default" will still be able to buy homes with conventional loans, at regular down payments. They will have to prove credit worthiness, just like people did before the craziness of the recent real estate boom.

Many economists believe that part of our overall econmic malaise is due to over-involvement by the government in supporting housing.

I wrote a post called "Walking Away -- Into Quicksand" two days ago, where I quote and cite the WSJ, the Washington Post, the LA Times, Steve Harney from the KCM Crew Blog, and yes, CNN Money. Most people agree that massive reform is needed to save our ability to fund any loans at all....
1:24am • #4
JUN
21
2010

Leslie

Thank you for your response to my post regarding the FHA Reform Act (H.R. 5072). as Amended. I share your concern about the potential negative impact of a large scale nation wide epidemic of underwater distressed home owners walking away from their homes. This could happen unless the banks get a lot more pro active in working with distressed home owners in co operating with them in processing their loan modification applications including adapting a policy of considering principal reductions when appropriate and necessary. We will also need for the banks to become a lot more proactive in working with the real estate community and approving under water home owners for short sales on their homes as a option to a foreclosure such as Wachovia  Bank is now doing.

With 25% of home owners in a negative equity position and in excess of 10% now in default due to current economic conditions and a high long term  unemployment rate without wide rapid wide spread loan modifications including principal reductions and approved short sales more foreclosures and "Strategic Defaults"  are going to occur.

My concern regarding the Current Wording of the Strategic Default Addendum is that it could impose a life time restriction eliminating the possibility of future FHA financing and associated home ownership on hundreds of thousands of forclosed upon Americans home owners. Over 70% of these victims of the current  foreclosure crisis go to foreclosure without talking to any one about their available  options. This provision as worded could put millions of uninformed, confusted foreclosed upon past home owners on a list of people who would not have the ability to get back into the real estate market for years if ever. I agree it would be a social class specific restriction because the upper middle class with cash reserves and high incomes would not be  severely impacted. Just that segment of our lower middle income population struggling to get back into a home will be locked out of the market for the rest of their lives. I would speculate that this will be good for owners or rental property.

Could this restriction on future financing  reduce demand and lower prices even further in the future? I doubt if much thought or study has been given to that question by the drafters of this resolution. What we do know for sure is that a provision has been inserted in this bill that if passed as written and interpreted restrict hundreds of thousand if not millions of people from being to repurchase a home using FHA Financing. I thing that most real estate agents and others would agree that this situation might have some severe negative impact on future real estate prices

What the exact rules will be and who it will effect we no not know. All we know for sure at this time is the provision says homeowners who "strategically default" what ever that means would be  ineligible for an FHA-insured loan in the future.  That sounds a lot like eternal damnation to me and for committing a act that the terms and conditions are not defined at this time. I have found based on my past experience that you can just take it on faith in matters such as this that it will just work its self out and THEY will take care of IT.

 STRATEGIC DEFAULT- For purposes of this subsection, the term ‘strategic default' means, with respect to a residential mortgage loan, an intentional default having such characteristics or under such circumstances as the Secretary shall, by regulation, provide.'.

"The FHA reform bill, including the Agency ban on "Strategic Defaulters", has not yet been approved by the Senate.

 The National Association of Realtors needs to move rapidly and strongly be sure that this very dangerous Strategic Default Provision is either dropped from the bill or very carefully defined and restricted in the Senate Version to be sure that the purported intent of this provision is the result we all finally wind up with. 

 Fred Martin

 
8:33pm • #5
JUN
23
2010
425,184 Points 45 Featured Posts Outside Blog Attended Rain Camp

I was reading about this and began looking for more details and just happened to stumble upon your great post.  Thanks for getting all the fine details together.

It is kind of crazy how they pass these things and leave the important details to be worked out later.  How does anyone plan anything?

It will be interesting to see how they eventually define strategic default and then how everyone begins to find ways to get around the new definition.
9:54pm • #6
JUN
24
2010
1,210,622 Points 118 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

I can understand the points on both sides. I am not for government intervention. I am not sure, though, that people who were to entreprenereal, can be bailed out, and people who had more business savvy, can't. So, is it to help stupid and punish smart?

One has wasted everything and can't pay, so he is fine.

The other did not waste everything, and theoretically can pay the mortgage, so he will be punished for not acting more responsibly

Something not right
12:49am • #7


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