Strategic Default May Be a Risky Option for Many Borrowers

Two recent reports by the Office of the Inspector General of the Federal Housing Finance Agency (FHFA) may make strategic default an especially risky option for borrowers in Illinois.  The Inspector General recommended that FHFA, the agency that oversees Freddie Mac and Fannie Mae, increase its efforts to pursue deficiency judgments against borrowers after their homes have been foreclosed upon.

What is Strategic Default?

Strategic default happens when a borrower decides that it’s in their financial interest to stop making payments on their mortgage.^[1]  Usually these borrowers are “underwater” on their home, meaning that they owe substantially more on their mortgage than their home’s value.  Often the mortgage payments that these borrowers owe account for a burdensome percentage of their income.^[2]

After a creditor forecloses on a property and sells the property at auction, they sometimes come after the borrower in court to collect the difference between the balance of the mortgage and the amount the home sold for at auction.^[3]  These deficiency judgments are unsecured debts, like old credit card debt, and the creditor can initiate collection proceedings to collect on the debts.^[4]

Freddie Mac and Fannie Mae have recently been lax in collecting deficiency judgments.  According to the Inspector General reports, Freddie Mac did not refer approximately 58,000 foreclosures to its collection vendors to pursue deficiency judgments from January 2010 to June 2012.^[5]  During that same time period, Fannie Mae failed to refer 30,000 foreclosures to its collection vendors.^[6]  An additional 15,000 Fannie Mae loans were ruled to be uncollectable by the vendors because they weren’t processed before the statute of limitations ran out on the deficiencies.^[7]

The Inspector General made many recommendations in their reports, including that Freddie Mac and Fannie Mae take steps to deliver documents to collection vendors before the statute of limitations on the loans runs out.  Additionally the Inspector General recommended that Fannie Mae and Freddie Mac create financial incentives and penalties for the vendors to collect as many deficiency judgments as possible.^[8]

Deficiency Judgements in Illinois

Deficiency judgments are legal in three dozen states and the District of Columbia.^[9]  Many of those states, however, limit the amount of the deficiency judgment to the market value of the home and provide time limitations on when a creditor can pursue a deficiency judgment.^[10]  Illinois is one of only a few states that allows almost unlimited deficiency judgments on foreclosed properties.^[11]

In Illinois, creditors can try to collect the total difference between the balance of the mortgage and the amount the home sells for at the foreclosure auction.^[12]  Debtors have rights to certain property and a percentage of their income, but some income and property can be garnished by a creditor as a result of a deficiency judgment.^[13]  A debtor often must assert their debt protection rights in court by telling a judge that they are exercising a right over certain income or property.^[14]

It is important for borrowers to review all their options if they face a burdensome or underwater mortgage.  While borrowers can get rid of their mortgage through strategic default, they may face wage garnishment after foreclosure.   This is especially true if Fannie Mae and Freddie Mac are successful in implementing the Inspector General’s recommendations.  Strategic default proves to be a risky option for borrowers in Illinois and other states that allow unlimited deficiency judgments.

Contact Us

Contact EV Has, LLC today at 1-312-775-0980 (and press 1) to speak with an attorney who will go over your case file to your options with you today!