What is a Strategic Default?

Posted by: Peter McCullough on July 30th, 2010

A strategic default is when a homeowner walks away from their home when they owe more on the home than it is currently worth. In some circumstances, the homeowner can afford to make the mortgage payments, but due to the decreased value of the home under the current market conditions, they feel it is a financially sound maneuver simply to leave their home behind and rent or try to find another home which has also lost value.

Thousands of homeowners have strategically defaulted on their homes and have left the mortgage company holding the bag. The mortgage company now has an asset for which they do not have a revenue stream. Plus, the property is now a liability because the mortgage company is obligated to maintain the property so that adjacent homes do not further lose value.

Due to the enactment of new Fannie Mae regulations, a strategic default will now have more severe consequences for the homeowner than in the past. Starting in July, Fannie Mae has indicated that they will no longer guarantee loans to homeowners who walk away from their mortgages for a seven year period. It will also attempt, where legally possible, to force the homeowner to pay for losses incurred through the default.

However, if a homeowner makes an attempt to work with a mortgage company through a short sale or by obtaining a deed in lieu of foreclosure, Fannie Mae has indicated that they would be willing to offer new loans within a two year period.

If the homeowner can demonstrate hardship, Fannie Mae will be willing to offer new loans, loan modifications or short sales to help the homeowner.

Real estate agents should view this as an opportunity to help homeowners through difficult financial times. Count on the fact that a homeowner will be eternally grateful and more likely to provide referrals if the efforts of an agent help them keep their home.



3 Comments on “What is a Strategic Default?”

Carmen Brodeur

I hope the government comes down hard on strategic defaulters. They are making the real estate market even worse for the rest of us who have more ethics and integrity.

Alex Cortez

I’m not a big fan of homeowners walking away from a mortgage they CAN afford merely because the property has depreciated. The home comes on the market as an REO, the bank has to write off the loss, and the neighbors have to live with the resulting lower values.

Keith B

Those with the integrity to stay in a devalued property should be commended for their values. Unfortunately, the banking industry does not play by the same moral code. Ask anyone who attempted to work within the system for a solution to an unaffordable home. The bank will much rather take back that home, cash in on a government bailout, then, take the profit on the auction sale.
Everyone should remember that the while many homeowners bought homes beyond their means (house poor), they did so with the bank and mortgage providers blessing. It was the lender that chose to look the other way when a walmart clerk stated their income at $75-80k a year and no one even asked how that was possible. Now, real homeowners just, essentially, lost their life savings in their real estate investment. And they should stay why? Because it is morally right? When the banks start operating under a moral code, we can ask the average citizen to step up and do the same. An bank would not foster a multi thousand doallr loss for the next 30 years, why should the consumer?

Leave a Comment


For Real Estate Agents

Online Marekting Solutions

For Home Buyers and Sellers

e.g., 1250 S Main St, Burbank, CA or 91506
     Search Foreclosures    Search New Homes    Search Rentals    

Blog Categories

Blog Archives

Real Estate Blogs

Top Articles

Recent Comments

Guaranteed LeadsReferral Lead ProgramListings PackageVisits to your WebsiteFind REALTOR®Homes For SaleHome Values