Do All Strategic Delinquents Play The System

Look out for your letter and proclaim “No-no-no . . . I’m Not A Delinquent Homeowner”

This sounds a bit like one of the late Frankie Lymon’s songs but he was singing in denial about being delinquent. Sadly he died of a heroin overdose at the age of 26, suggesting that he succumbed to delinquency later if not as a teenager. In this context delinquency was something teenagers had a choice about and they could choose not be delinquent and stand up to peer-pressure when tempted as the lyrics of the song preached:

"But listen boys and girls

You need not be blue

And Life is what you make of it

It all depends on you I know, because I'm not a juvenile delinquent."

Apparently some homeowners have made a choice to skip payments to strategically default. This frequently happens after a substantial fall in the house’s value and when the debt owed is (substantially) more than the value of the property — the property suffers from negative equity, frequently termed underwater — and is expected to remain the same for the foreseeable future, such as after the last real estate bubble burst after prices overheated between 2006 – 2008. These delinquent borrowers are termed “Walkaways.” Strategic defaulters on a home mortgage have been jokingly referred to as senders of "jingle mail" Some even just posts the keys in an envelope to the bank.

The ABA (American Bankers Association) has recently warned about consequences of strategic default whereby the bank can obtain a judgement and go after the defaulting homeowners assets. This can include anything of value like another property in their name (as opposed to a trustee or LLC ownership), bank accounts with deposits, cars and investments.

Surely there should be a different criteria applied to defaulters who mislead their lender and try to conceal assets as opposed to defaulters who made a choice about not paying the debt in order to put food on their family table?

We had debt forgiveness last year and now here comes another spanner in investor’s wheels. From July 1, 2013 the FHSA (Federal Housing Finance Agency) is sending out letters to borrowers who’ve been underwater for a period ranging from 3 months to 24 months. Offers of loan modifications are to be made through a new “Streamlined Modification Initiative” to prevent foreclosures. There is no approval process necessary and payments can be made within the trial period of the program. After only three on time monthly payments the loan modification status becomes permanent. Apparently Fannie and Freddie couldn’t wait and started the process early. The trial ends by December 31, 2015.

Let’s hope that the FHSA uses some discretion as to those deserving underwater defaulters who can receive the loan modifications and let the ABA peruse the well off strategic / delinquent loan defaulters?