Penalties for Strategic Defaulters Sought

By
Real Estate Agent with Palatium Auction and Appraisal Service, Real Estate Auctions, Estate, Moving, Downsizing Auctions 618-233-1000 USPAP Appraisals proesch@ptauctions.net

Tumbling property values have left nearly a quarter of borrowers owing more on their mortgage than the home is worth, and recent studies have shown that when underwater, more and more of these homeowners are opting to walk away from their loan obligation even if they can afford to make the payments.

This idea of “strategic default” has become a universal concern within the industry, particularly since the social stigma attached to foreclosure has changed so dramatically in the aftermath of the housing crisis.

While defaulting strategically is not as frowned upon by the general public as it used to be, there are some lawmakers whose disdain for the practice has sparked a push to institute stronger deterrents for walking away and penalize those that do.

Last week, the U.S. House of Representatives passed the FHA Reform Act, with measures designed to replenish the Federal Housing Administration’s (FHA) depleted reserves.

A lesser publicized provision that was tacked onto the bill at the last minute would make homeowners who strategically default ineligible for an FHA-insured loan in the future.

The rider was introduced by Rep. Chris Lee (R-New York). Speaking on the House floor, Lee, who already had the backing of those in his party, tried to drum up Democratic support for the add-on stipulation.

“If a borrower makes the decision to strategically default on a loan, they certainly should not be allowed to benefit from a government-subsidized program,” he said.

The provision passed in a voice vote, without opposition.

“We are not talking about those families who have no choice or who simply can no longer afford their payments,” Lee said. “We are talking about the new phenomenon of a person who voluntarily chooses to stop paying their mortgage even though they still have the ability to pay.”

The FHA reform bill, including the agency ban on strategic defaulters, has not yet been approved by the Senate. And some onlookers say the part targeting borrowers who up and walk away will be particularly tricky.

It would require the HUD secretary to devise a strategy for defining and pinpointing strategic defaulters, implement screening procedures to ensure these homeowners are not granted an FHA-backed mortgage, and then enforce the new policy.

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Paul
Paul Roesch
Realtor, Auctioneer, CAI, AARE, CES, GPPA, ATS
Marketing Director 
Certified Distressed Property Expert, CDPE
618-407-8479 cell
proesch@ptauctions.net

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Rainmaker
684,312
Dan Edward Phillips
Dan Edward Phillips, Humboldt and Del Norte Counties, CA - Eureka, CA
Humboldt and Del Norte Counties, CA

Thanks for the informative blog and the link, it will be interesting to see what happens.

Jun 19, 2010 05:06 PM #1
Rainer
133,145
Bryan Watkins
LRA Real Estate Group - Mesa, AZ

good info. I don't know what the best solution is. There are tough times out there.

Jun 19, 2010 05:11 PM #2
Rainmaker
490,940
Paula Hathaway, REALTOR, LBA
Douglas Elliman Real Estate - Southampton, NY
...The Most Informed Agent In The Hamptons!

It will be interesting to see how this all unfolds--just how are they going to be able to identify the person who has walked away? Do they tell the officials who are penalizing them that they can afford the mortgage but just want to walk away?? ..NOT! Great post--keep us posted, Please! :)

Jun 19, 2010 05:14 PM #3
Rainer
232,295
Sara Woolford & Steve Golson, ALHS
iTexas Realty Co. - San Antonio, TX

Hi Paul-

I don't know how they will ID these specific defaulters, but I wil be interested to hear more as the process develops.

--Sara in San Antonio

Jun 19, 2010 05:18 PM #4
Rainer
258,689
Mick Michaud
Distinctly Texas Lifestyle Properties, LLC Office:682/498-3107 - Granbury, TX
Your Texas Lifestyle is Here!

Strategic defaulters should be published so that the rest of the business community knows to steer clear of such people who have no integrity or scruples.  You can't do business with someone whose word is meaningless.

 

I wonder if NAR would include something in the code of ethics to address this with RE professionals?   I know the Texas Real Estate Commission runs background checks on licensees to determine if they are of good ethical and moral character.  Think this might have an impact on license renewals?

Jun 19, 2010 05:44 PM #5
Ambassador
1,951,682
Fernando Herboso - Broker for Maxus Realty Group
Maxus Realty Group - Broker 301-246-0001 - Gaithersburg, MD
301-246-0001 Serving Maryland, DC and Northern VA

New laws being enacted that will play a major role in our jobs. . . I'm bracing!

. .if it applies. . .Happy Father's Day!

Jun 19, 2010 11:39 PM #6
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Rainmaker
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