Fannie Mae recently took an assertive step, in its own mind at least, to stem the growing tendency of mortgage borrowers pulling off strategic defaults. In that homeowners who could afford their payments choose to walk away from the obligation anyway. The GSE went ahead and added another category to the new policy. Home loan recipients who fail to do a workout in good faith also fall under the spell of its new guidelines. What this all means is that property owners fitting these parameters would be ineligible for mortgages backed by Fannie Mae for seven long years from the recorded foreclosure date.
Strategic default entered the already crowded mortgage and real estate vocabulary just recently when the ever thinner-skinned housing bubble couldn't hold on any more worthless air and popped. The event sent property values on a long skid toward the beckoning abyss and in the process wiped out equity in numbers not seen in modern times. Eventually home prices sank below the underlying mortgage balances and to the utter horror of observant homeowners just kept on going down, spawning the unpleasant designation for the phenomenon; underwater. And those underwater on their mortgages are prime candidates for a strategic default.
Right now Fannie Mae controls a decent chunk of the mortgage market and that gives its policy adjustment some teeth. Yet, as government-affiliated home loan providers today just about completely dominate the housing finance arena, no one else has thus far followed suit. Freddie Mac and FHA are the other major performers and predictably will then attract with their less restrictive rules much of the business Fannie Mae will be turning away.
The private home loan sector is still struggling to rise from the ashes, but when they do so Fannie Mae's policy is bound to lose even more of its bite. Mortgage applicants - with strategic default/ foreclosure on their record - with down payment funds and solid income will be shopping for the best deal and private mortgage lenders with their innovative minds are certainly going to find a way to accommodate this specialty slice of the real estate market pie.
As things stand, Fannie Mae's policy change seems to hold minimal deterrence power for homeowners contemplating to go for the now notorious strategic default. People simply have too many options besides Fannie Mae to look at.