House of Representatives passes provision to stop "strategic default"

Real Estate Agent with Allison James Estates and Homes BRE# 01875177

On Thursday June 10, 2010, the Democratic controlled House of Representatives passed the Federal Housing Administration Reform Act of 2010 also known as H.R.5072.  The bill mainly helps to replenish the funds FHA uses to insure mortgages against default.  It accomplishes this by moving some of the upfront costs to spread them over the life of the mortgage and raising the premium cap by as much as 300%!  FHA also estimates is will generate $300,000,000 a month in additional funds, but at a cost of $42 a month more to borrowers.

The most intriguing part of the bill though came at the last minute thanks to Rep. Chris Lee (R-New York).  The provision would make borrowers who "strategically default" on their mortgages ineligible for a FHA insured loan in the future!  Strategic default has become a huge issue across the nation, but especially in our hard hit Central Valley real estate market.  A strategic default is when a home owner just walk away from the mortgage because it now longer makes financial sense, even though they can afford the monthly payment.

Rep. Chris Lee said on the House floor, "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 also said, "We are not talking about those families who have no choice or who simply can no longer afford their payments, 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 added provision passed in a voice vote of the House without any apposition.  The whole bill still needs to pass the Senate though.  The one sticky part of this bill would be how will you determine who are the strategic defaulters?

I applaud the idea though and hope it deters people from strategically defaulting, because there are plenty of people who are in REAL need!  A short sale to avoid foreclosure is still the best option for most home owners in default.

Comments (5)

Wayne Johnson
Coldwell Banker D'Ann Harper REALTORS® - San Antonio, TX
San Antonio REALTOR, San Antonio Homes For Sale

Jeffrey, I agree with you the principal objective is good, I just don't see an easy way to get this administered.

Jun 28, 2010 05:51 AM
Jeffrey Reyes
Allison James Estates and Homes - Walnut Creek, CA

Yes Wayne it will be difficult.  Plus, who wants the government looking into our financials and making those decisions? That's the trickiest part.

Jun 28, 2010 05:55 AM
Daniel Sosa

Great article,


So much so that I am posting it on my Real Estate Cafe fan page.  Check it out :-)

Jun 29, 2010 05:13 AM
Jeffrey Reyes
Allison James Estates and Homes - Walnut Creek, CA

Thanks so much for that Daniel!

Jun 30, 2010 06:07 AM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Haven Express @ Keller Williams Arizona Realty

Strategic Default is an acronym for cowardice.  If one is an ostrich - then stick your head in the sand.  If you are a responsible individual - do a Short Sale - unless your legal and tax advisors tell you to do otherwise.

Jul 09, 2010 06:55 AM