Strategic Default and Fannie Mae

Fannie Mae wants to defer strategic default with consequences
Wednesday, June 23rd, 2010 By
Thomas Hart


Fannie Mae, which owns or guarantees more than half the mortgages in the U.S., wants to crack down on surging trend of strategic default.
Fannie Mae upped the ante on strategic default of home mortgages Wednesday, saying that borrowers who default despite having ability to pay or do not seek alternatives in good faith won’t be eligible for a new Fannie Mae-backed mortgage for seven years from the date of foreclosure. Strategic defaults are increasing along with home foreclosures. Numerous offers are proliferating online to assist in strategic defaults. Last week the House passed the FHA Reform Act with a provision for penalizing strategic defaulters in the bill.

Strategic default consequences
Fannie Mae, which owns or guarantees more than 50 percent of mortgages in the U.S., wants more severe strategic default consequences. It is now refusing to back new loans for walk-away borrowers for seven years after they abandon their homes. In a press release, Terence Edwards, executive vice president for credit portfolio management at Fannie Mae, said “Walking away from a mortgage is bad for borrowers and bad for communities, and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”

Fannie Mae to sue strategic defaulters
In the press release, Fannie Mae, said it will also sue to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and make recommendations for strategic default cases that warrant the pursuit of deficiency judgments.

Defining strategic default
The strategic default issue is a thorny one because of the challenge to define what makes a default strategic. The Washington Independent reports that strategic defaulters aren’t really breaching their contracts. Every mortgage contract defines exactly what happens if the borrowers don’t pay: the bank evicts them and takes the home. It’s doubtful that the government could stipulate that homeowners have to hand over the last of their savings to the bank before they can walk away, or that they have to be hand over a certain percentage of their annual income before they walk away. The money people have left could be used to move to an apartment, pay medical bills or to buy shoes for their kids.