The increase in number of those who chose to do a strategic defaulter has made collection an expensive and ineffective process.
 
The economic downturn in 2008 was the trigger for real estate bubble, which left millions of homeowners underwater. Most of the properties lost their value and homeowners lost any potential hope of regaining equity in any foreseeable future. However, some of the borrowers who defaulted strategically were at the happier end of the real estate turmoil by purchasing a house before they let their current one go to short sale or foreclosure. Not only this, the government didn’t require these defaulters to pay taxes over the forgiven debt income until 2013. Strategic defaulters walked away with their debts, no deficiency, no taxes…and leaving lenders agitated. Most of the lenders have been demanding stringent collection practices ever since.
 
Is it too late to try to collect from borrower who did a strategic default?
 
According to the reports of the Inspector General in September 2013, both Fannie Mae and Freddie Mac had the ability to follow borrowers who defaulted strategically and were capable of paying back the mortgage. Had these firms done so, they might not have needed the $187.5 Billion bailout in 2008.
 
However, the improvement in the housing industry has helped these giants to cover up for the bailout amount. Some conservatives have the opinion that strict actions should be taken against strategic defaulters who exploited the system. However, they fear that the improvement in housing market and profitable stature of the mortgage giants might drift the momentum from money collection to other matters.
 
According to the current foreclosure process, Fannie Mae and Freddie Mac have the authority to pursue homeowners for the difference between amount owed and sale price of the property (aka “deficiency“). The report prepared by the Inspector General mentioned more than 100,000 cases with a cumulative loss of $6 Billion where these mortgage giants failed to pursue the borrowers. The FHFA has some regulations in the pipeline, which will ensure that both of these mortgage giants now perform their duties in an efficient manner.
 
The Inspector General believes that such disciplinary actions will nail down the number of strategic defaulters in upcoming years. The GSEs are firm about their collecting practices in future; however, the existing defaulters would not be liable to any obligations whatsoever. According to a survey conducted by ID analytics in October 2012, one-third of the homeowners agreed that the homeowners should be able to default strategically on their loan without any legal consequences. Further, more than 17 percent of the homeowners have one or more strategic defaulters in their circle and nearly 13 percent would like to default strategically on their mortgage.
 
Challenges to pursuing those who did a strategic default
 
State laws are another major hindrance in the process.  On top of that, lenders must file all the mortgage papers to keep their claims alive. In addition to these issues, it is quite expensive and inefficient to collect money from individual homeowners. Further, legal battles against borrowers with bogus bankruptcies are expensive and might not yield profitable results.
 
Rising home prices have proved to be most effective deterrent against strategic defaulters. The improvement in real estate market has given hope to the underwater homeowners, and has also stymied potential strategic defaulters from being able to afford a much bigger home.  Whether you believe doing a strategic default on mortgage is moral or now, for lenders a legal battle against defaulters is an inefficient way to solve this national issue. Is it wise on lender’s part to collect money from strategic defaulter? The answer is quite logical- No.
 
Now that investor activity has slowed down in many markets, it’s arguable that the real estate market could use every sale it can get.
 
What do you think?
 
Tracy (G+) is an Arizona Short Sale Realtor, Investor, Rehabber, and Foreclosure Expert.
 
She also is an avid blogger, vlogger, contributor to Real Estate Magazines, and hosts Real Estate Rescue, a show dedicated to the distressed property market.