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

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