Strategic Default Monitor – How To Strategically Default

Tuesday, April 6, 2010

Does Fannie Mae Recognize Strategic Defaults?

The article entitled Fannie Mae Sees Strategic Default on the Minds of Underwater Borrowers by Diana Golobay of HousingWire provides some interesting messages.

The writer states: "A contagion effect within communities is leading borrowers to consider default as an acceptable option in the face of financial hardship, Fannie found. Both delinquent and current mortgage borrowers are more than twice as likely to have seriously considered stopping payment if they know someone who has already defaulted."

MY COMMENT: This is stating the obvious. Essentially a borrower decides to stop payments because its a financial strain. However, the decision to strategically default is not always based on "financial hardship", instead it is based on cash preservation and savings protection. At some point in time the federal government will recognize this.

The writer states: "Kathleen Day, a representative at the Center for Responsible Lending [said] from everything we know, no one defaults if they could possibly stay in their homes...we just don’t see people responsibly walking away. It’s people who are at the end of their economic rope.”

MY COMMENT: Once again this shows the lack of understanding behind the various reasons for a strategic default. A strategic default is all about a person "responsibly walking away."

The writer states: “The public also strongly believes in the importance of upholding the financial commitment involved in buying and owning a home, even during these challenging times when home values have fallen,” said Fannie president and CEO Mike Williams"

MY COMMENT: Ummm. Excuse me. Who is "the public"? Is "the public" the actual homeowners who own a property with a value less than the mortgage balance. It is not rational to continue to hold an asset that has a debt greater than it's worth. The "challenging times when home values have fallen" refer to an unaware property owner bleeding themselves of cash and savings while supporting a worthless asset.

The writer concludes with: “These findings underline the very large number of people whose homes are worth less than their outstanding mortgages and even larger numbers who are worried about covering their costs and expenses generally,” Harris Interactive said in the poll results. If the percentages are converted into numbers, approximately 27m adults believe they are ‘under water’ – that their houses are worth less than their mortgage debts.”

MY COMMENT: If 27 million adults believe they are 'under water' what should they do? It seems as if Fannie Mae doesn't have an answer that can help these people. That is why people are taking their financial matters into their own hands.

Strategic defaults will continue to be an important strategy for homeowners and any other debtor. Our governments seems reluctant to accept the current principles of strategic default. While understandable, it still pushes the concept that "society" must uphold its financial commitment to make payments on worthless assets thereby bleeding all cash and savings. Unfortunately, we did not hear the same call about upholding financial commitments when trillion dollar bailouts were handed out to some of the largest corporations.

It is all a matter of perspective. Perhaps the our government will come up with an effective solution. For now, homeowners and debtors alike must take their debt matters into their own hands.

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