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Home | News | Foreclosure | House Republicans Want Penalties for Strategic Defaulters
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House Republicans Want Penalties for Strategic Defaulters

Tumbling property values have left nearly a quarter of borrowers owing more on their mortgage than the home is worth, and ""recent studies have shown"":http://www.dsnews.com/articles/studies-find-strategic-defaults-are-on-rise-2010-05-03 that when underwater, more and more of these homeowners are opting to walk away from their loan obligation even if they can afford to make the payments.

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This idea of ""strategic default"" has become a universal concern within the industry, particularly since the social stigma attached to foreclosure has changed so dramatically in the aftermath of the housing crisis.

While defaulting strategically is not as frowned upon by the general public as it used to be, there are some lawmakers whose disdain for the practice has sparked a push to institute stronger deterrents for walking away and penalize those that do.

Last week, the U.S. House of Representatives ""passed the FHA Reform Act"":http://www.dsnews.com/articles/house-passes-fha-reform-bill-allowing-higher-mortgage-premiums-2010-06-10, with measures designed to replenish the Federal Housing Administration's (FHA) depleted reserves.

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A lesser publicized provision that was tacked onto the bill at the last minute would make homeowners who strategically default ineligible for an FHA-insured loan in the future.

The rider was introduced by Rep. Chris Lee (R-New York). Speaking on the House floor, Lee, who already had the backing of those in his party, tried to drum up Democratic support for the add-on stipulation.

""If a borrower makes the decision to strategically default on a loan, they certainly should not be allowed to benefit from a government-subsidized program,"" he said.

The provision passed in a voice vote, without opposition.

""We are not talking about those families who have no choice or who simply can no longer afford their payments,"" Lee said. ""We are talking about the new phenomenon of a person who voluntarily chooses to stop paying their mortgage even though they still have the ability to pay.""

The FHA reform bill, including the agency ban on strategic defaulters, has not yet been approved by the Senate. And some onlookers say the part targeting borrowers who up and walk away will be particularly tricky.

It would require the HUD secretary to devise a strategy for defining and pinpointing strategic defaulters, implement screening procedures to ensure these homeowners are not granted an FHA-backed mortgage, and then enforce the new policy.

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About Author: Carrie Bay

Carrie Bay
Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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