Strategic Default and Fannie Mae
- Author Jennifer Warriner
- Published September 14, 2010
- Word count 408
Fannie Mae announced in June 2010, that a new set of policies is designed to deal with strategic defaulters (those who have the means to pay their mortgage but choose not to pay because they are so far underwater it no longer makes financial sense to pay the mortgage. ) People who choose to strategically default will be barred from Fannie Mae loans for seven years.
The government sponsored enterprise, which has been under government conservator-ship since 2008, announced that those who are strategic defaulters "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 time-frame".
According to a Fannie Mae executive they are taking these steps to highlight the importance of working with your servicer. Fannie Mae takes the position that strategic default is bad for borrowers and communities. It definitely hurts a persons credit rating, but those who are opting to strategically default have often weighed this consideration against the alternatives and choose to default anyway. It can hurt communities by driving down housing prices by virtue of putting additional distressed housing stock on the market. More strategic defaults also means more losses for Fannie Mae.
In a statement, Fannie Mae stressed that borrowers who made good faith efforts to work with lenders in order to "resolve their situation" will be eligible for Fannie Mae loans much quicker than those who walk away. Fannie Mae stated also that it will pursue deficiency judgments against strategic defaulters in states where that recourse is available to lenders.
This raises several questions: how will Fannie Mae know whether someone is strategically defaulting or not? Certainly in some situations it will be obvious, but in other situations it will not be. Also, how much will it cost to pursue deficiency judgments, and is it worth it? Finally, does holding strategic defaulters out of the housing market for seven years cause more harm than good?
The topic of strategic default is a difficult one. One the one hand, there is a lot to be said about honoring contracts and obligations. On a different side, strategic default is a financial decision, and businesses do it all the time, and are never really criticized on the moral grounds that residential strategic defaulters are.
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