Fannie Mae, Freddie Mac to go After More Strategic Defaulters

The LA Times recently reported that Frannie Mae and Freddie Mac are going after more strategic defaulters.

Now this should not really be a surprise. According to the reports for Frannie Mae and Freddie Mac:

  • From January 2010 through June 2012, Fannie Mae had 595,128 foreclosures of which 293,134 (49%) were sent to its vendors to pursue post judgement collections. The other 301,994 foreclosures were not sent for various reasons, including state laws that prohibit pursuit and borrowers who did not meet Fannie Mae’s strategic default criteria.
  • From January 2010 through June 2012, Freddie Mac had 220,000 foreclosures of which 117,000 (53%) could have been sent to vendors to pursue post judgement collections but only 59,000 were sent. The other 103,000 foreclosures could not be pursued due to state laws.

While the LA Times article points out that there were 102,652 foreclosures Frannie Mae and Freddie Mac did not refer or collect the deficiency, the bigger story is that half of all foreclosures were sent to vendors, or should have been, to pursue post foreclosure collections and/or deficiency judgments.

The reports also point out the fact that Fannie Mae and Freddie Mac want to focus more on strategic defaulters for the following reasons:

  1. Achieve greater deficiency recoveries
  2. Avoid reputational risk associated with going after people who could not pay the deficiency
  3. Deter other borrowers from walking away from their mortgages if they can afford to pay

What Does Strategic Default Mean?

For the purpose of the LA Times article, strategic default is defined as when someone who can pay for their mortgage walks away, especially when the home has become an upside-down property.

However, I like to say that all defaults are strategic defaults. Being upside-down in a property is a financial hardship, especially for clients that are getting close to retirement. Even if you can pay your mortgage today, an upside-down property may put your financial future at risk.

Not Surprising, Really

In the wake of the financial crisis, banks in general were just focused on processing foreclosures – and keeping themselves from going bankrupt. Historically, foreclosures would be processed after 90 days of being delinquent. After the financial crisis banks took up to 2 years before filling the foreclosure lawsuit – with an average time of approximately 6-7 months.

Most of this timing has to do with banks doing balance sheet management, since they did not want too many foreclosures hitting their books at once.

Since there was so much focus on balance sheet management, the lenders have not pursued many deficiency judgments in Florida – and also because they had, until recently, up to 5-years from the sale date to pursue a deficiency judgment.

However, in Florida this past July the rules changed.  As of July 1, 2013, lenders seeking a deficiency judgment must file a Motion for Deficiency Judgment within 1-year of the foreclosure sale date.   Additionally, any foreclosure sale date that occurred prior to July 1, 2013, must also initiate a deficiency action prior to July 1, 2014 to pursue the deficiency, provided that July 1, 2014 is still within the original 5-year statute of limitations window.

Of course, this is still more time than 10 states that have only 30 to 180 days to pursue a deficiency judgments.

Freddie Mac Deficiency Recovery Overview

So now 5 years after the financial crisis, banks are turning their attention to deficiency judgments.  In the article it points out Fannie and Freddie have done a poor job pursuing deficiency judgments, and I would argue other banks have done a poor job as well.  However, as more banks turn their attention to pursuing deficiency judgments and following a process like the one pictured above, having a lawyer to help with your case will be important.

What Does This Mean For You

  • If the banks are going to be looking more closely at borrower financials, then more borrowers may opt for foreclosure, instead of short sales and loan modifications (where financial disclosures are part of the process).
  • If you are considering strategic default, it is imperative to work with an experienced and knowledgeable lawyer – one who will look at your unique situation and help you develop a strategy.  If you are going to reveal financial information to the lender, pre-planning is critical.
  • Even if the banks get the house back in a foreclosure or they get money from a short sale, absent a written agreement to the contrary, you could still be at risk of owing the bank the deficiency – especially here in Florida.  Know that banks are pursuing deficiencies and prepare accordingly.
  • Even if you did not defend your foreclosure suit; do not try to defend a deficiency action on your own.  Seek legal advice.
  • Finally, and possibly the most critical advice of all, if you did not respond to the foreclosure suit, or you were defaulted, the lender does not have to put you on notice that they are seeking a deficiency judgment.  The lender presently has 1-year from the sale date to pursue a deficiency.  Therefore, if you did not respond to the foreclosure suit, or were defaulted in the foreclosure suit, you must monitor the court docket at least monthly, or seek the advice of an attorney.  You don’t want to wake up one day to having your accounts or assets garnished.

The post Fannie Mae, Freddie Mac to go After More Strategic Defaulters appeared first on Castle Law Group.

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