Conyers, Kaptur Bash Fannie for Penalizing Strategic Defaulters

This week, Reps. John Conyers (D-Mich.) and Marcy Kaptur (D-Ohio) sent a letter to Treasury Secretary Timothy Geithner and Edward DeMarco, the head of the Federal Housing Finance Agency, asking them to justify Fannie Mae’s policy of penalizing or suing strategic defaulters — those who can pay their mortgage but chose not to.

“We believe that this opaque, overbroad, and punitive policy, as conceived by Fannie Mae, is a poor use of taxpayer dollars and will unnecessarily include individuals who are not choosing to default on their mortgage,” they write. “Furthermore, this policy is one of many which seems to run counter to the national need to stem the tide of foreclosures which are devastating communities across our nation.”

In June, Fannie Mae announced new penalties against defaulters it deems strategic. The ailing government-sponsored enterprise said it will lock out from getting a Fannie-backed mortgage anyone who could afford to pay her mortgage but chooses not to, and defaults instead, for seven years. Fannie also said it will go after strategic defaulters in court, a policy it put into effect on July 1: “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.”

But Fannie never said how it would determine who was defaulting strategically, and who was merely a few months away from going broke and belly up on the mortgage as well. As I have written before, despite the flashy media stories, there is little evidence that a rash of strategic defaulters are sending the keys back to the bank and heading on lavish vacations or buying new SUVs. Most homeowners who default are deeply underwater — meaning they owe far more on their mortgage than their home is worth, and if they sold the home they would still owe the bank. And the vast majority have incurred job loss or another income shock leaving them unable to afford their home.

Conyers and Kaptur argue that Fannie and Freddie are merely “pursuing expensive litigation against a vulnerable population when there appears to be little to no economic incentive is questionable at best.”

The letter is strongly worded: “At a time of record deficits and a nation crying for the government to get its finances in order, it is unclear why Fannie Mae is proposing to use taxpayer dollars to pursue legal judgments against individuals who will lose or have lost their homes, have wrecked their credit rating, and likely have little or no remaining monetary assets.”