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Those Who Walk Away Could Be Penalized

The number of people ‘walking away’ from their mortgage obligations has reached epidemic proportions in this country. Strategic defaults account for 31% of all mortgage defaults. Walking away from an underwater house may seem like the easiest way out of the financial burden created by your monthly mortgage payment. And it looked as though there was no real downside to doing it.

That has now changed. The FHA and mortgage lenders are starting to let borrowers know that you will pay a price when you try to re-enter the housing market in the future if you walk away today.

The Los Angeles Times in an editorial on strategic defaults reported:   

During debate last week on a bill (HR 5072) to shore up the Federal Housing Administration’s mortgage insurance program, the House decided to crack down on such “strategic defaults.” Lawmakers agreed to a proposal by Rep. Christopher Lee (R-N.Y.) to make those who strategically default ineligible for new FHA-insured loans.

CNN Money reported two weeks ago:

While homeowners who default due to economic hardship, such as a job loss or divorce, normally must wait two to five years before buying a home again, walkaways may face double that time.

“It could be well over seven or eight years before [walkaways] are able to obtain a mortgage to buy a home again,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association.

So lenders may look at applications from one-time strategic defaulters and say, “Yes, they walked away but it’s a whole different market now,” according to Keith Gumbinger, of the mortgage information publisher HSH Associates.

Even so, lenders may require more from borrowers who walked away than those who didn’t. “To the extent they could get a mortgage,” said Brinkmann, “they can count on needing a heavy down payment.” The lenders may ask for 30% down or more. That would provide enough collateral cushion that the bank could get all or most of its money back in a foreclosure. Strategic defaulters might also be charged higher interest rates, even above the levels other borrowers with similar credit scores would receive.

Before walking away, a borrower should get counsel from an expert to find out what future price they will pay for doing so.

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  1. […] You can find more information on the negative ramifications to the borrower here. […]

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