Posts Tagged ‘strategic defaults’

Fannie Mae Fall Out

In a New York Times article today, lending experts sounded off concerns about Fannie Mae’s new hard line approach toward strategic defaulters.

For one, the experts say, in a time where the banks, including Fannie and Freddie, received big taxpayer bailouts, it is going to be hard to convince borrowers that they should end up stuck with the tab. For another, they wonder how Fannie intends to weed out those who strategically default from those with financial troubles.

The experts were also puzzled about just what Fannie intends to accomplish. Fannie spokespeople have said that they want to force people to work with their servicers on alternatives to foreclosure such as lender approved short sales and deeds in lieu. However, as I have pointed out  in yesterday’s post on the subject,  lenders and servicers have proven completely unwilling to work with borrowers on so called “foreclosure alternatives.”

Furthermore, this policy does nothing to address the negative equity problem, known colloquially as being “underwater,” where a borrower owes more on his home than it is worth. As the article points out:

About a quarter of homeowners with mortgages, or about 11 million households, owe more than their home is worth, and are potentially vulnerable to a strategic default. A flat or rising real estate market could encourage many of them to hold on; a declining market would suggest it was time to go.

While negative equity by itself does not cause foreclosures, it does encourage them in a down market. There are many reasons why someone, who isn’t having trouble paying his or her mortgage, may choose to walk away. One of them is because he or she has done the math and it doesn’t make sense to continue to “throw good money after bad.” Another could be that he or she needs to move because of changes in employment or other issues, and can’t sell the house because of how much he or she owes.

Whatever the reason, businesses make such choices all the time. Why is Fannie Mae trying to punish people for engaging in rational economic decision making? The answer is that neither Fannie nor any other large lender out there wants to come to grips with the reality that all they’re holding on to is worthless paper.

Fannie Mae’s Wrong Headed Gambit To Staunch Strategic Defaults

Last week, Fannie Mae issued a press release announcing that it was putting into place policy that would block strategic defaulters from getting a new Fannie Mae backed loan for seven years following the foreclosure.  In addition, Fannie Mae will also instruct its servicers to pursue deficiency judgments against borrowers where they are allowed.

Clearly, mortgage lenders do not like strategic defaults. They don’t like them because they’re kind of a wake up call to reality. Once lenders are forced to take back a home, they must face the immediate loss in value, which is why they want people to continue to pay. As long as they’ve got a paying mortgage, they can keep pretending the property securing the mortgage is worth the note value.

Yet, you’d have to have been living under a rock not to know that neither the lenders nor the servicers have done much to help homeowners avoid foreclosure. They’ve been recalcitrant when it comes to both loan modifications and short sales and many homeowners have, understandably, thrown up their hands and decided that walking away could save them a whole lot of stress and aggravation.

Instead of actually forcing its servicers to engage in meaningful work-out solutions with borrowers, Fannie Mae is, in effect, sticking its head in the sand and pretending that we aren’t in a foreclosure crisis at all.  The lenders do not want to face any losses at all, which meaningful work-out solutions would invariably force them to do, though not as steep as they would face in foreclosure.

Buy VerizonCell Phones and Save. | Thanks to Bank Rates & Reviews, CD Rates and UK Loan
Easy AdSense by Unreal