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Fannie Mae gets tough on strategic defaulters
WASHINGTON – July 19, 2010 – Borrowers who walk away from mortgages they
can afford to pay – making “strategic defaults” – are running increasing risks that
they’ll be penalized for doing so.
Starting in October, Fannie Mae says, strategic defaulters will be disqualified for
new Fannie Mae-backed loans for seven years after their foreclosures. Fannie also
says it will go to court where it can to recoup outstanding mortgage debt from
borrowers who strategically default.
Under a bill that’s passed the House and awaits Senate action, the Federal Housing
Administration would be barred from insuring mortgages for those who previously
ditched a mortgage they had the ability to pay.
Get-tough policies are forming at the same time that about a quarter of mortgage
borrowers owe more than their homes are worth.
Fannie Mae buys about 40 percent of all mortgages and packages them for resale to
investors. The FHA insures about 30 percent of home mortgages.
Freddie Mac, which also buys mortgages, says it is examining Fannie Mae’s policy.
To determine if a borrower is in default, Fannie examines whether the homeowner
still has access to credit and is paying that debt and others.
Cracking down on strategic defaulters is controversial. Some lenders say it is
necessary to stem the tide of homeowners shirking their obligations.
“We need to start treating bad behavior with serious and measureable consequences
so that we can get this nation back on its feet,” says Daniel Smith, vice president of
mortgage banking at First Place Bank in Livonia, Mich. “Washington needs to come
up with a uniform law on this issue.”
Others say homeowners who may appear guilty of strategically defaulting really can’
t afford to make mortgage payments.
“It seems like an overreaction,” says Howard Banker, a founder of Fair Mortgage
Collaborative, a consumer education non-profit in New York. “If you do default, it
goes into foreclosure, and that’s already very damaging to your credit.”
Other policies may be more effective than penalizing strategic defaulters, says Mark
Zandi, chief economist of Moody’s Analytics. Changing bankruptcy laws to allow
bankruptcy judges to reduce debtors’ mortgages is an example, he says.
“I’m not a big fan of using the stick to get people to stay in their homes. There are
instances where it makes no financial sense for them to stay in their homes,” Zandi
says. “And how do you know, really, if someone is strategically defaulting?”
Two out of five homeowners say they would consider walking away from their
mortgages if their homes were worth less than what they owed, according to a
survey by Trulia and RealtyTrac.