Yesterday Fannie Mae announced a new set of policies designed to deal with strategic defaulters – those who have the means to pay their mortgage but choose not to pay because they are so far underwater it no longer makes financial sense to pay the mortgage. People who strategically default will be barred from Fannie Mae loans for seven years.
The government sponsored enterprise (GSE), which has been under government conservatorship since 2008, announced that strategic defaulters “who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe”.
According to Fannie Mae executive Terence Edwards “We’re taking these steps to highlight the importance of working with your servicer”. Fannie Mae takes the position that strategic default is bad for “borrowers and communities”. Fannie did not expand on why strategic default is bad. Surely it hurts credit ratings, but those who are opting to strategically default have often weighed this consideration against the alternatives and choose to default anyway. It certainly hurts communities by driving down housing prices by virtue of putting additional distressed housing stock on the market. Strategic default is definitely bad for Fannie Mae. Fannie Mae has been hemorrhaging money for a while now, and along with fellow GSE Freddie Mac has required $145 billion worth of taxpayer money in order to stay solvent. More strategic defaults=more losses for Fannie Mae.
In its statement, Fannie Mae stressed that borrowers who made good faith efforts to work with lenders in order to “resolve their situation” will be eligible for Fannie Mae loans much quicker than those who walk away. Fannie Mae says that it will pursue deficiency judgments against strategic defaulters in states where that recourse is available to lenders.
This raises several questions: how will Fannie Mae know whether someone is strategically defaulting or not? Certainly in some situations it will be obvious, but in other situations it will not be. Also, how much will it cost to pursue deficiency judgments, and is it worth it? Lastly, does holding strategic defaulters out of the housing market for seven years cause more harm than good?
The topic of strategic default is a difficult one. One the one hand, there is a lot to be said about honoring contracts and obligations. Strategic defaults often hurt neighbors, many of whom acted responsibly and see their property values hurt. On the other hand, strategic default is a financial decision, and businesses do it all the time, and are never really criticized on the moral grounds that residential strategic defaulters are. What are your thoughts on this matter?
Let us know in the comments section below.
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