Fannie Mae Penalizes Strategic Defaulters
Fannie Mae, the ailing government-sponsored entity that buys mortgages on the secondary market, has bumped up penalties for strategic defaulters. Now, it will lock out anyone who could afford to pay her mortgage but chooses not to, and defaults instead, for seven years.
It is not entirely clear how this will work, because Fannie does not originate mortgages. What will happen, I presume, is that Fannie will somehow blacklist the borrower, making it less likely that a loan-originating bank will give her a mortgage. In this case, I imagine, that borrower will not have access to a conforming loan, meaning she either will not get a mortgage or will get a more expensive and risky exotic product. Additionally, Fannie says that in jurisdictions where it can, it will go after strategic defaulters to get back the money it lost on the mortgage.
Here is the full release, and I’ll update as I figure out just what this means for defaulted borrowers:
Fannie Mae announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers 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.
“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management. “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 will also take legal action 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 put forth recommendations for cases that warrant the pursuit of deficiency judgments.
Troubled borrowers who work with their servicers, and provide information to help the servicer assess their situation, can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. A borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances. These policy changes were announced in April, in Fannie Mae’s Selling Guide Announcement SEL-2010-05.
Mike Konczal at the Roosevelt Institute has some good thoughts on this. My question remains: How does Fannie know who is a “strategic” defaulter, and who is a plain-old defaulter? Most “strategic” defaulters, I have found, would be plain-old defaulters within a matter of weeks or months — particularly given that 80 percent of subprime borrowers who default do so only because of income loss.