BluefoxToday blog : Curious strategic mortgage default legislation proposed

Curious strategic mortgage default legislation proposed

Washington has already come up with some unusual and at times confusing legislation during this enduring housing collapse to correct perceived deficiencies. HVCC – the Home Valuation Code of Conduct – addressing the alleged appraisal problems of the recent past is one. The new RESPA – Real Estate Settlement and Procedures Act – is another that has led to many complaints and questions from the mortgage and real estate industries and puzzles the consumer as well. More of the same could be forthcoming.

House Republicans presented a surprise rider at the end of an FHA-related debate the other day that would prohibit mortgage borrowers who engineer a strategic default while still able to make payments from getting any future government-sponsored loans. Basically meaning FHA, VA, Fannie Mae and Freddie Mac. This proposal passed on a voice vote without any dissent probably because everybody was in a hurry to exit town for the weekend.

What is bothersome about this idea is that it would single out mortgage recipients for supposedly being morally wrong and for that they shouldn’t be allowed to enjoy any government benefits. Businesses, including mortgage lenders, constantly pull off strategic defaults when it’s in their best economic interest and no one waves a red flag saying it’s misguided. Some of the biggest mortgage banks just got bailed out, for starters. They also find tax breaks and other government support very useful. To be fair about this, companies then should face the same restrictions upon strategic default as homeowners do.

Wall Street’s greasy fingerprints appear to be all over this strategic mortgage default provision. They are seemingly becoming more common as the real estate meltdown lingers on and the home loan banking interests want to send a warning signal to homeowners who are toying with the idea. Really bad things will happen should they do it.

But the whole thing reeks of a double standard. What’s good for a company should go for an underwater homeowner as well. Fortunately the idea is just taking its first baby steps and once people read the details and find out what it really means it may not go very far. Enforcement alone would be a chore. Besides, it also needs to pass the Senate.



Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006

Comment balloon 14 commentsEsko Kiuru • June 13 2010 10:33PM


Esko - Wall Street’s greasy fingerprints appear to be all over this strategic mortgage default provision.  I think that says it best.  The lobbyists are much too involved in the legislative process, and the American taxpayer ignored.

Posted by John Mulkey, Housing Guru ( about 9 years ago

Esko this does not surprise me.  It was only a matter of time before a message was sent out there, that defaulting on mortgages, especially mortgages that you can still make the monthly payments on, was gong to come with a heavy penalty.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) about 9 years ago

Esko, our country is headed down a slippery slope with this proposal. Congress is up to no good and talk about a double standard. Not one single entity is looking out for the homeowner. I am so disgusted.  Joe The Homeowner is officially hung out to dry by the very people who are supposed to be in office representing him.

Posted by Kate Kate about 9 years ago


It seems a tough task to pull off but somehow we need to get control over the lobbyists.

Posted by Esko Kiuru about 9 years ago


Let's see how far the proposal goes in the next several months.

Posted by Esko Kiuru about 9 years ago


One mortgage industry observer now argues that double standard would be officially legislated in this case, if it goes through.

Posted by Esko Kiuru about 9 years ago


I missed that legislation. How does someone know if a default is strategic or not? Can you post the link to the bill?

And I am with you - sick of the bankers nice relationship with Congress and with the agencies. I read that Schumer's take from financial industry is over $17,000,000.

Wow. I wonder who he represents?

Posted by Richard Byron Smith, NMLS #184479, Mortgage Loan Officer (Mortgage Loan Officer, Fairway Independent Mortgage Corporation NMLS #2289) about 9 years ago

I thought I commented already on this one, weird :)

Anyways I am with Richard, how are they going to know if it is strategic or not?  I do hear word on the street that the deficiencies are coming down on the foreclosures and short sales.  Took them a while.

Posted by Renée Donohue~Home Photography, Western Michigan Real Estate Photographer (Savvy Home Pix) about 9 years ago


For the actual rider, check the above link to the article that alerted me to this development. Wall Street has Washington figured out.

Posted by Esko Kiuru about 9 years ago


The lenders somehow find out homeowners' income levels and use that as a starting point. Deficiency issue is probably going to get pretty ugly, especially in hard-hit areas.

Posted by Esko Kiuru about 9 years ago

Shorts and Seconds have 6 years.  I imagine many lienholders will push it to 5.5 years.  This started end 2006 - we are looking mid 2011.

Posted by Renée Donohue~Home Photography, Western Michigan Real Estate Photographer (Savvy Home Pix) almost 9 years ago

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.

Posted by Tony and Suzanne Marriott, Associate Brokers, Serving Scottsdale, Phoenix and Maricopa County AZ (BVO Luxury Group @ Keller Williams Arizona Realty) almost 9 years ago


That's a long time to plan what to do.

Posted by Esko Kiuru almost 9 years ago


Everyone's situation is different and all options should be considered with a legal adviser before doing anything.

Posted by Esko Kiuru almost 9 years ago