In my opinion, this is nothing more than a scare tactic.

1. Who knows how long Fannie/Freddie will be alive. They are owned by the government and on their last leg. New estimates show that it could cost the taxpayer $1 TRILLION. Will the government keep them alive indefinitely? Or is there a plan to dismantle them all together? If Fannie/Freddie won't be around in 7 years, I don't think this rule will make much of a difference. There still is no decision what will happen to them.

2. The alternative is FHA. If you are not allowed to get a Fannie/Freddie loan, FHA has not implemented this rule. If FHA follows suit, then it could become a serious dilemma. As of now, I am pretty sure you only have to wait 3 years from foreclosure; strategic or not.

3. How will Fannie/Freddie determine if your default was strategic? I think it will be very difficult to prove/determine it was done purposefully.

4. Additionally, even if you are unable to buy a home in 7 years, it could take much longer than that to recoup the loss on your home. One has to ask them self if the punishment outweighs the cost.

Seven years is a long time. A lot can happen from now until then. I think this will make homeowners think twice about a strategic default. However, I think homeowners will still go that route if severely underwater.

So, the new question should become: Do I strategically default my Fannie/Freddie loan and wait 7 years to get another Fannie/Freddie loan? Or, do I wait 3 years and get an FHA loan instead?

People who strategically default are living up to the terms of their mortgage. All mortgages state that you either make all your payments OR the bank gets to take the house back. The fact that these houses are now worth so much less than their mortgages is due to the fact that the banks have foreclosed on so many of their neighboring homes.

This weekend I read in two separate places how Strategic Defaults up till now have added money into the economy through the additional cash that strategic defaulters continued to use in the local economy. The challenge in the Wall Street Journal article was that these "Strategic Defaulters" are running out... Meaning there aren't that many more out there that have the option of defaulting prior to the payments overwhelming the homeowner and that this means that consumer spending will no longer be positively impacted by Strategic Defaulters.... Ultimately its probably a mute point come the fall when the Stimulus money has all but dried up and then in the next year when a significant round of new taxes kick in at the federal level. At that point discretionary will be eaten up in just funding governments...

BTW: We've continued to pay our mortgage even though Strategic would have been the way to go six months to a year ago... If what happens in the stock market, stimulus and taxes continue I'm not sure how we would hold out Strategic or otherwise... Most likely become a renter in the next 12 - 18 months.

Strategic default is a legal business option. So is denying the defaulter access to another mortgage. All seems fair to me.

Remember, foreclosure, including the strategic default option, is the cure to our current housing diseased state.

Seems like it is too easy to pass rules on strategic defaulters... as I walk from my home in AZ I keep in mind how 4 out of 5 of my neighbors were subprime, a few had bankruptcies.

Now they want to make mortgages harder to get great!

So in 2001 I pay a reasonable price for my house get a 30 year mortgage and pay solid for 10 years. Didn't use it as an ATM either! Value is gone, foreclosures are selling for 75k or being auctioned for 55k... I can afford my house but not the 10 years to just break even.

What's missing from this discussion thus far are the deficiency judgments that go far beyond just blacklisting you from being able to buy for 7 years. In states that allow them to (which is most of the country) they will be attempting to garnish wages to forcibly extract this money from people's future paychecks. Having come across numerous cases of these involving car loans, they have always struck me as a bit "heads I win, tails you lose." Many people with shaky credit already pay higher interest rates, purportedly due to higher risk of default. But if the bank thinks they can through asset repossession and wage garnishment, recover all the money due to them, where's the risk?

At least debtor's prisons are still illegal, for the time being.

Mowbray,
Of course mortgages will be hard to get for those who have defaulted. But this doesn't mean that you cannot own a home. It just means that you will have to be very frugal and fiscally responsible, and raise a lot of money for a vary large downpayment, and find a mortgage though a lender that trusts you.

Or, just save enough to buy it for cash and it is yours.

You still have a choice. You just cannot get a free lunch.

I still find it surprising that people are unaware that a house is an asset subject to market fluctuations. It's almost as if they never owned any other stocks, bonds or commodities and were surprised by volatility. A $100,000 loss, whether for a year or 5 is nothing if you have exposure to the market either through work or savings. I don't know why people would take the risk or potentially endless collections, destroyed credit and loss of honor to save a few bucks while screwing over your neighbors.

"Many people with shaky credit already pay higher interest rates, purportedly due to higher risk of default." I would argue that the knuckleheads who couldn't pay bills in the first place and had bad credit had too low of interest rates since the overall fees/interest rates didn't adequately cover all the foreclosures costs among risky borrowers. Better yet, people with a low propensity for paying their bills are better off if their access to credit is delimited, whether for 7 or 70 years.

I think mortgage companies or any lender should go after defaulters, whether they are companies or individuals, as aggressively as possible.

If someone stiffed me for hundreds of thousands of dollars I would bid it out to a few collection agencies and take the highest bidder.

For situations where there are health issues, etc.... then those defaulters should be able to enter into humane bankruptcy proceeding.

I had a friend who earned nearly 300k at their old job, but got tired of the stress and decided to become a teacher and then walked away because their 900k house could only fetch 550k and they struggled with the payments. I thought that this was lame and irresponsible.

I think it is lame and irresponsible and possibly unethical to you and your family to continue to be a debt slave in order to avoid "screwing over your neighbors".

The teacher who walked made a very wise business decision.

I sold a home midway through the bubble rise, and missed the second half of the run up. By your logic, someone owes me a few hundered K...

DISCLAIMER: OPINION NOT FACT

Somebody got tired of the stress and decided to become a TEACHER???

You bring up some good points "Little Debbie". However, there are some that I disagree with.

1. Yes, a house is an asset. However, compared to stocks, it is illiquid. People can sell their stocks and get out when they want. You can't just sell your home when you want to pull out. Your options are limited. Yes, there are market fluctuations in real estate as there is in the stock market. However, the real estate market will not see the same type of appreciation as during the boom years. The rate of inflation is a realistic long term gain. In the stock market, a 20% return could be realized without blinking. If you lose 50% of your portfolio, it could take just a few short years to make the money back. In real estate, it could take 10 years to make that money back.

2. The subprime borrowers you are referring to did pay higher interest rates. Even some folks with good credit were put in subprime mortgages and they weren't able to afford it either. Besides, maybe it is not so much the interest rate that was the factor? Maybe it was the underwriting guideline that spurred these defaults? Stated income, stated assets, no doc, etc.? I hate to say it but these types of loans were not limited to just subprime. There was also the "Alt-A" and even Fannie/Freddie had these types of loans. Subprime loans were doing just fine before these products came out. I honestly would not be surprised to see subprime make a comeback when this crisis is over. With proper underwriting guidelines, subprime loans can be effective. Today, they call it a hard money loan.

3.Lenders should not go after defaults in my opinion. There are many businesses who strategically default on commercial properties. Morgan Stanley strategically defaulted on $8 BILLION worth of commercial loans on 5 separate properties. It's ok for them to get out of it but the "average Joe" can't? The question of morality has been brought up many times. Is it immoral for an individual to walk away but acceptable that a multi billion dollar investment firm to do it themselves? If it is acceptable for publicly traded companies to strategically default on BILLIONS, why can't the homeowner default on a few hundred thousand?

4. Collection agencies won't collect a penny unless there is a judgment in hand. Even then, there is no guarantee to collect. The banks are most likely unwilling to spend additional thousands of dollars on these foreclosures without a guarantee to collect. Going after homeowner's could actually increase their losses. If it were profitable, I would probably think it would be done on a more regular basis.

5. A bankruptcy would be feasible for anyone who lost their home to foreclosure, medical or not. Of course, a BK attorney would have to give proper advice and which type to file (Chapter 13 or 7).

6. Your friend did the right thing. How long would it take to make back $400k on their home? If they can barely make ends meet, how can you blame them? I think it would be wrong to judge your friend because they decided to get out of financial ruin. Your home should not ruin your finances for life. Obviously if you live paycheck to paycheck, barely hanging on, and have $400k in underwater mortgage, you do what is necessary to get your head above water. You look out for your best interest just like the bank looks out for theirs. If the banks really cared about your friend, they would have reduced the principal balance to current value instead of selling it for the lower amount. The bank did what was best for them. Your friend did the right thing in doing what was best for them.

They ought to be publicly flogged and made to pay back every cent lost.

Taxpayers are bailing out the banks that suffer these losses. Taxpayers are being gouged so Congress can spend billions "helping homeowners avoid foreclosure". Then you have these selfish, sociopathic deadbeats contributing to the problem.

Wow Kevin: Tell me how you really feel! :)

An overly simplified version of the collateral damage.

1. Homeowner or company doesn't pay.

2. Bank holding note now has to adjust collateral on loans and decides to cut lending to the manufacturing plant even after raising money through higher fees, cutting staff and the government.

3. Manufacturing plant lays off people who then foreclosure.

4. Neighbors lose more value in their house increasing their risk of foreclosure.

5. Repeat steps 2-4.

At the end of the day, people with less marketable skills or greater sociological struggles (i.e. minorities) will suffer the most while those with enough capital and smarts figure out a way to exploit the situation will prosper.

That said, I can see the wisdom in strategic defaults in all assets/liabilities: autos, real estate, investments, even children and marriage, but from my atheistic pragmatic/utilitarian philosophical bent it creates greater economic and moral problems in the long run to default on one's obligations as a first resort.

"Little Debbie", enjoyed your post as usual...just to make sure - as you wrote in your step 3 "Manufacturing plant lays off people who then foreclosure."

Is "foreclosure" a verb or a noun?

It's a tough argument to make that someone who borrows money but doesn't pay it back is the injured party. Looking at such a scenario I'd say the creditor bears the brunt of the hurt, not the debtor. It's as simple as who has something to lose, and who has nothing to lose? Even if the argument of reduced investment and employment elsewhere is valid, and it's debatable at best, the benefits would be solely captured by the defaulting debtor, why the losses would be spread out on others. My marginal cost/marginal benefits, game theory analysis of such a scenario says such behavior is rationale. Selfish yes, but rationale and to be expected.

I posed this exact argument probably close to 3 years ago when talk first emerged about bailing out homeowners and I pointed out that would be absurd because the only party with anything to lose in these transactions were the banks and nobody outside of Marie Antoinette would dream of bailing out guys like Citi or Bank of America. Hindsight.

The truth is when a house of cards collapses it is those enjoying the view from the top who have the most to lose and therefore will fight the hardest to hold on.

"Little Debbie", what do you propose be done in order to break this vicious cycle? Or anyone for that matter?

How to best mitigate moral hazard is the million dollar question?

In the case of bank bailouts, preventing collapse was a less destructive than a few people gaming the system.

In the case of homeowners, which I think prevents an almost equally serious threat to western finance, it would be less destructive in the short term to beef up both the carrot and stick approaches that have already been rolling out.

Do people respond better to carrots or sticks? I don't know.

As a couple of practical steps, I would say

1. Force bankruptcy if they want to walk away out of fear that they these debts will haunt them for many years to come. In my opinion, local court systems are best suited for evaluating each bankruptcy and consequences should be meted out there.

2. Although this is highly speculative, I wouldn't be surprised if modest inflation becomes a government agenda.

3. The incentives have been too top-down. I think states, counties, and cities should reach out to homeowners and let them know that an abandoned house will harm their neighbor. If it comes from Washington it might sound too abstract; if it comes from people nearby it might have more of an effect. If local civil servants learn that they might be out of a job because of falling property tax revenue, they might be inclined to stanch the bleeding.

4. If anyone ever wants an executive level, or even middle management position, they would be better off knowing that foreclosures could eliminate them from any pool of applicants at most companies for many years.

"Little Debbie,"

Banking on the fact that you're probably one of the few here who has taken a money and banking course so you understand how our monetary system actually works, what do you think of the following bank bailout alternative: guarantee FDIC insured accounts and nothing more. In an extreme enough example facilitate transfer from failed banks to brand new banks. Checking/savings accounts remain intact. M2 remains intact given that almost all of it is FDIC insured. The loans creating the money supply are unaffected. Any contraction through loan destruction can be compensated for by adjusting the reserve requirements of the new banks. Defaulters would be penalized by holding price levels and M2 constant as opposed to the falling prices these defaulters would otherwise benefit from. Who loses under this scenario? Managers of our savings who proved themselves unfit to manage our savings as they would be removed from power under this scenario. Who benefits? Anyone aspiring to expand their assets under management who didn't prove incompetent, in addition to the rest of society for averting the bailout's moral hazard.

RE 2: Are you familiar with the following line from the Bernanke doctrine? I'd say we're already running that play: "The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."

RE 4: MD almost (and I think rightfully so, but it failed under pressure from business groups) passed a law that would prohibit credit checks in all but a handful of cases. The practice as it is has a real potential to kick a man when he's down and keep him there. Extended periods of unemployment can be disastrous to credit ratings and having that hinder your employment prospects piles onto the caste system we're heading towards.

Good suggestions. I have a few of my own. However, they may be a little drastic and could bring on the pain we need to suffer to get this over with.

1. Foreclose ALL delinquent loans in a timely manner. This means as soon as the homeowner is 90 days past due, file the foreclosure proceedings ASAP. If courts are backed up, hire more people to handle the volume. To avoid increased costs to the system, increase the filing fee.

2. Release ALL shadow inventory on the market ASAP to get rid of excess inventory even if it means lowering home prices in the short term. Keeping homes off the market is only going to prolong this crisis. We need to speed up the process and get it over with, even if it means home values will go down in the short run due to excess supply. Once these foreclosures are sold off, home values will begin to recover as distress sales will be off the market and no longer a factor.

3. Get rid of the deficiency judgment so homeowners who are unable to repay can start over WITHOUT filing a bankruptcy. Also, extend the Debt Forgiveness Act so homeowners will not be forced to pay income taxes on the loss. Yes, this could create a moral hazard. However, I don't think it is any different then what we have now. This would only allow homeowners to walk away without additional burdens. The banks have enough excess reserves to cover losses.

So long as nothing is done to BREAK the cycle, the housing mess could take 5 to 8 years before there is any sustainable recovery. The idea is to speed up the process so that we can see a recovery quicker even if it means more short term pain. We need to cleanse the system completely, take out the delinquent homeowner, and replace them with homeowners who will repay their loan. Once completed, we will have hit a bottom and banks will begin lending again to small businesses. The longer it takes to see a recovery or bottom, the more times this vicious cycle CAN be repeated. This is of course my opinion/solution/theory that would solve the problem. So long as this continues to be spread out over time, I don't see anything really getting better. It has already been proven that loan mods do not work and banks will not reduce principal balance.

Frank makes excellent points above. I’ve been saying this the entire time. Unload the current inventory of REO/Bankowned/Short Sales, and the housing market will begin to recover, but as long as we slowly sell these properties over time, the longer this process is going to take. Keep in mind that appraisers are using distress sales in their reports, because this is considered normal listings through a lot of areas in the US, therefore as long a home has been sold within the last 6 months, it could be considered a comparable for appraising. If you unloaded everything, once that last waive of distress sales are completed, in theory you would have legit sales, asking legit prices.

But what you have to keep in mind is Banks/Investors are using these assets to manipulate their books. Example: if a bank secured a loan 2 years ago for 200K they has an asset for 200K; now if the foreclosure can only be sold for 100K, they have to show 100K asset and 100K loss. That doesn’t look good for investors or for the required cash/asset ratios which need to be met. It’s a big mess, hopefully they find a resolution.

Working for a Florida Mortgage Company, I speak to a lot of homeowners, all wondering what’s the best option. As a Florida homeowner myself, which is underwater on his properties, I would like to see some type of Principle Reduction Program, even if it means giving up a portion of the appreciated value to the government/banks. At least this would stop the bleeding of “strategic defaults”, empower homeowners to rebuild their savings, and start the recover process of the US Housing Market, and potential Global Markets.