Bankruptcy is an Option for Homeowners who Default on Mortgages After Fannie Mae Policy Change

As an alternative to bankruptcy, some struggling homeowners in the Atlanta, Georgia area and across the country have increasingly turned to “strategic default” as a coping strategy for dealing with real estate that is “under water.” or does not have equity. A piece of real estate is under water when the mortgage balance is higher than the fair market value of the home. Homeowners with properties that are underwater will often stop paying their mortgage even if they are technically able to make the payment and eventually surrender the property through foreclosure; this practice is known was “strategic default.” This practice is an especially appealing option if a borrower has an adjustable rate mortgage and knows that his/her mortgage payment will increase to an amount higher than is affordable, making foreclosure seem inevitable. In a “strategic default” the borrower defaults not because he or she is totally incapable of making the payment, but, rather, because it is not in his or her best interest to do so. Because this is rather a shrewd practice and causes banks to lose money, starting October 2010, strategically defaulting will have new, unfortunate consequences.

In June 2010, Fannie Mae, the federally-backed mortgage lender, announced that beginning in October, 2010, it would change its policy in an effort to encourage homeowners to “work with their servicer” and not strategically default on their mortgages. Under the new policy, defaulting borrowers who were able to pay, or did not “complete a workout alternative in good faith” will be banned from receiving a new Fannie Mae-backed mortgage loan for seven years from the date of foreclosure. This new policy is devastating, in light of the fact that in the current credit market, it is next to impossible to get a mortgage that is not somehow connected to Fannie Mae or Freddie Mac. Additionally, if you live in a state, such as Georgia that allows deficiency judgments, Fannie Mae has announced that it plans to take legal action to recoup outstanding debts from borrowers who strategically default!

For homeowners who cannot afford their mortgage, bankruptcy and home loan modifications may be an alternative option for addressing unaffordable mortgage payments. In a Chapter 13 bankruptcy case, the debtor/homeowner can place mortgage arrears into a reorganization plan and use a period of up to five years to repay the arrears. The debtor can also petition the bankruptcy court to extinguish his or her second mortgage if the property has so little equity that the house is worth less than the balance of the first mortgage. In such a scenario, the second mortgage company would lose its status as a “secured creditor,” meaning that the house would no longer be attached as collateral for the loan. During the five-year bankruptcy period, the debtor would not be required to make the monthly second mortgage payment. For more information, see my article regarding mortgage lien stripping.

Even when a debtor is in a bankruptcy case, he or she can pursue a home loan modification. There are no laws in Georgia and no federal bankruptcy laws that require a mortgage company to modify the terms of a loan. However, most mortgage companies have modification and home retention departments that may be able to assist debtors with the process. There are some non-profit organizations, such as the Neighborhood Assistance Corporation of America, a HUD-approved organization, that assist homeowners with home retention options.

If you are a Georgia homeowner facing financial difficulty bankruptcy is an option that you should consider. Bankruptcy can provide protection while you get your financial affairs in order and may even allow you to retain your home. It is important that you consult a qualified bankruptcy attorney. For a free consultation please contact the Law Offices of Dixon Davis at (404) 593-2620 or email info@bettydavislaw.com for more information.