On June 10, 2010, the U.S. House of Representatives passed H.R. 5072, the FHA Reform Act of 2010. This bill was passed by an overwhelming majority and contains many provisions that REALTORS will be familiar with. The bill addresses the immediate concerns of the agency and also the long-term viability of the mortgage assistance programs. The bill allows FHA to raise the mortgage insurance premium it can charge while lowering the up-front fees that may prevent cash-strapped homebuyers from being able to close. It also gives FHA enhanced authority to crack down on lenders engaged in fraud or misrepresentation or failing to comply with FHA guidelines for originating or underwriting loans.
While the bill includes provisions that have been discussed for many months now, it also includes a provision that targets a very recent issue in the housing industry: strategic default. At the end of consideration of the bill, House Republicans proposed a change to the bill that will prohibit individuals who strategically default from participating in any FHA housing programs to buy another home. The provision requires FHA to define strategic default and to work with lenders to identify and prevent strategic defaulters from getting an FHA loan.
This provision must still be considered in the Senate and it could prove to be very challenging to enforce, but this issue does seem to be a growing problem. In May 2009, CBS ran a story about strategic defaults and estimated that over 1 million homeowners who were underwater but could afford to pay willingly walked away from their mortgages. This practice further depresses home prices and leaves even more properties on bank rolls that must be auctioned at very low prices.
Should strategic defaulters be punished in anyway? In some states, a bank cannot go after people’s other assets to recoup the losses of a foreclosed home. From a quick search on RealtyTrac, it appears that in Virginia, a bank can go after a borrower for a deficiency judgment if the sale of the asset does not cover the loan amount plus applicable expenses. Is this becoming a big problem in VA? If so, should something be done to address it?
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