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Fannie Mae takes aim at defaulting homeowners

fanniedetourJPG.JPGFannie Mae has announced plans to "lock out" borrowers from getting a new loan if "they default on a mortgage they could afford to pay." If this is, as it seems, Fannie's strategy to cut down on strategic defaults, it's a little nuts.

For one thing, a mortgage is a specific contract. It says that if the borrower stops paying, the bank forecloses on his or her house. It does not say that if the borrower stops paying because a massive recession has destroyed his or her home values and made it impossible to find a job in the area, he or she is barred from participating in the secondary mortgage market five years in the future.

Secondly, how exactly is Fannie Mae proposing to judge who can afford to pay their mortgages and who cannot? The research we've got on this question concludes that most defaults are driven by house equity falling to below the value of the mortgage, combined with a major downward shock to income (a member of the family loses their job, for instance). Beyond that, defaults are rare except when the value of the home falls to less than 50 percent of the loan. Is Fannie Mae really willing to go after people in such desperate circumstances? Is Congress, which is currently propping up the mortgage giants, willing to let them?

Photo credit: AFP/Getty Images

By Ezra Klein  |  June 24, 2010; 4:04 PM ET
Categories:  Housing Crisis  
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Comments

i agree that the fact that fannie gets to decide who is strategic and who is a "regular" default is possibly problematic, but i'm surprised to hear that anyone who defaults on a mortgage under any circumstances could get another loan in 7 years. i would have guessed that a default would penalize you for about as long as a bankruptcy would.

given that they're loosening restrictions on defaulters who can show hardship, it's hard to guess up front how many people are worse off under this new policy. from the end of the wsj article you link:
"Even as it steps up penalties, Fannie is preparing to reduce waiting periods for borrowers facing hardship who surrender their homes and avoid foreclosure. Under previously announced rules that take effect next month, Fannie will reduce waiting periods to two years for borrowers who agree to transfer their homes to the company through a "deed in lieu of foreclosure," or who complete short sales, where homes are sold for less than the amount owed."

Posted by: amr11 | June 24, 2010 4:41 PM | Report abuse

What's the problem here? You apply for a mortgage, and you divulge your assets and liabilities. The credit system reveals you defaulted on a prior mortgage. Looking at the paperwork, it's clear you decided to make the boat payments instead of the mortgage payment.

No new mortgage. Life is hard, Ezra.

Posted by: Curmudgeon10 | June 24, 2010 4:50 PM | Report abuse

Yes, no surprise here.

Posted by: tomtildrum | June 24, 2010 5:06 PM | Report abuse

Isn't it more surprising that it's "new" for folks who could afford to pay a mortgage but elected not to do so are now precluded from doing so? Gee, I'd kinda woulda thought that would have been the normal, traditional way of doing things... woops, almost forgot that Barney Frank worked hard to make it possible for every deadbeat to obtain a mortgage on overpriced real estate.

Posted by: rmgregory | June 24, 2010 5:08 PM | Report abuse

Please don't be fooled by Ezra: "most defaults are driven by house equity falling to below the value of the mortgage". Wrong. This drives short sales, but has very little to do with regular default. The house value doesn't change the payment value.

Posted by: staticvars | June 24, 2010 5:16 PM | Report abuse

One in four mtgs. nationwide are under water - those people were not all careless overspenders, nor are they all making boat payments instead of house payments.
In some states, like mine, more than half of all mortgages are underwater. The unemployment rate in these states is also very high - see the parallel?
Those of us who bought during the boom are unable to sell, unable to refi (I pay 1.5% higher than market) and unable to modify (340k have gone thru HAMP successfully, vs. the 7-9 mil. Obama said would get help.)
We prop up banks with our boomtime interest rates and we pay more than our share of prop. taxes, by thousands of dollars per home.
Good luck running schools and police etc. on the peanuts the people who buy my house when I default will pay. You will be wishing I was back in place, as I would have been with a slight adjustment to my rate.
Mocking and deriding people who are carrying local prop. tax burdens for the rest is disingenuous. Maybe you did not relocate at the "wrong" time, when rentals were scarce and housing was high. Good for you.
So what? I did not have a car crash today, not sure that all to my credit. I welcome the stone-throwers to buy the foreclosed homes and see how the community runs on the lower taxes, times several million homes. 185K homes foreclosure every month now, nationwide.
Good luck with that.

Posted by: FloridaChick | June 24, 2010 5:22 PM | Report abuse

I am so angry about people whining that their house is worth less than their mortgage, so it is OK to walk away. A house is an investment you made a commitment to pay on. My house is worth $100K less than I paid for it, but I made the promise and I am not going to walk away. If people keep doing this, the economy will tank further.

If your income is the same, or you can afford to pay the loan, you are immoral creeps to walk away and should never be allowed a mortgage again (IMHO).

Posted by: shadowshopper1981 | June 24, 2010 5:29 PM | Report abuse

"The credit system reveals you defaulted on a prior mortgage. Looking at the paperwork, it's clear you decided to make the boat payments instead of the mortgage payment."

Or, as has been documented, you paid your credit card bills but not your mortgage. If you had a genuine hardship, lost your job, if your hours and pay were cut that's one thing and they should cut you some slack. But article after article after article has featured people who flat out stated that they could pay but decided not too.

Too bad that the value of your home went down. When you buy a new car the value decreases the second that you drive it off of the lot. Try telling the finance company that you aren't paying anymore because it's no longer worth the price you paid. Make sure you have access to public transportation when you do.

Posted by: onlytheshadowknows1 | June 24, 2010 5:52 PM | Report abuse

"For one thing, a mortgage is a specific contract. It says that if the borrower stops paying, the bank forecloses on his or her house. It does not say that if the borrower stops paying because a massive recession has destroyed his or her home values and made it impossible to find a job in the area, he or she is barred from participating in the secondary mortgage market five years in the future."

Of course it doesn't say that! Why should that be in the contract? It's common sense that if you default on a loan, your credit will fall into a hole. Especially if it appears you had sufficient means to keep paying and just felt like you didn't like the investment returns. Why on Earth should anyone give you money to be a repeat offender?

"Is Fannie Mae really willing to go after people in such desperate circumstances? Is Congress, which is currently propping up the mortgage giants, willing to let them?"

If by 'go after' you mean 'won't lend to them until June 2015', then yeah, sure, why not? I don't see how it's 'nuts'. If I were in charge of FNMA, I would prohibit lending to all strategic defaults forever. And some of those strategic default stories are very cut and dry. But if this makes Congress angry at the GSEs, well so much the better. The less support they have the better.

Posted by: justin84 | June 24, 2010 6:26 PM | Report abuse

"Or, as has been documented, you paid your credit card bills but not your mortgage."

That seems to be a bad trade...

Posted by: justin84 | June 24, 2010 6:30 PM | Report abuse

You know what's ironic is that many of you have no problem with corporations walking away from their debts ALL THE TIME. Republicans see no problem with this but become enraged when individual homeowners, who are considerably less well off than the corporations, default on their mortgages. You all are hypocrites.

Posted by: rlalumiere | June 24, 2010 7:24 PM | Report abuse

watch Elizabeth Warren give Timmy G. his due, on behalf of the millions of underwater homeowners brushed aside by banks he enriched with our tax dollars:

http://huff.to/ca9z5a

Posted by: FloridaChick | June 24, 2010 7:30 PM | Report abuse

As a responsible homeowner who has paid off five mortages in full, I would like to remind everyone that a mortgage is a financial contract, not a moral agreement. If it were in your bank's financial interest to foreclose on you, morality would have nothing to do with it. They wouldn't care whether you had been stricken with medical bills or lost your spouse. They would simply make the decision which financially benefited them, regardless of the moral justice of their decision. And so should you. If, considering ALL of the factors, it is financially in your best interest to walk away, you should walk away and never look back. In this situation, morality is a one-way street: your bank expects it from you but they will never, never give it to you in return. Don't be a sucker -- do what's best for you...

Posted by: jerkhoff | June 24, 2010 7:47 PM | Report abuse

I have all sympathy for those who've lost their jobs and go into foreclosure. I'd say if their circumstances improve in the future they would deserve a shot at a new load, rates mediated by their prior credit behavior.

I can't say the same for anybody who defaults because their house is worth less if they haven't lost their job. They are free to walk away from the contract, but why should a lender who has taken a loss on them lend to them again?

Everyone was happy to take the gain when home prices rose, when the opposite happens you take the loss.

Posted by: RedBird27 | June 24, 2010 7:59 PM | Report abuse

Big banks and big financial institutions made bad decisions that should have led to their failure. Our wise and benevolent government said that they were too big to fail and bailed them out. Their leaders are again collecting big bonuses.

People who took out mortgages, approved by these big institutions either can't pay the mortgage or find that the house is not worth the cost. The sensible thing is to get out of the house. But since they are not "too big to fail", the government wants to punish them.

Posted by: Desertstraw | June 24, 2010 8:57 PM | Report abuse

Mortgage Loan Modification is the only solution to save your home and stop foreclosure. Some 650,000 troubled borrowers have been put into trial loan modifications under the president's foreclosure rescue plan, the Treasury Department said Tuesday. That number represents only 20% of eligible homeowners. Mortgage Home Modification Program is the solution to save your house and stop foreclosure process Use this free tool to see if you qualify for loan modification http://bit.ly/b8C0iS

Posted by: michelpaul1 | June 25, 2010 4:18 AM | Report abuse

Fannie Mae needs to take aim at the Big Banks and their Big Bonuses! They got the world into this mess from their never ending greed and heartlessness. The banks would never worry about you if your spouse died, or you lost your job, or whatever form of hardship you could possibly truly have--they could care less about you! All they care about is the might dollar! Lobbyist and politicians go hand in hand - I mean pocket to pocket. People I beg you stop blaming your fellow neighbor for the choices they are forced to make or are smart enough to make by running not walking away of a very bad investment. Wake up and start blaming the banks and the politicians for this mess. As long as the housing industry is underwater, so will be all of us. Our home values will not go up, more losses of jobs to come, people we are in a pre-depression! Not a recession A Depression! Mass media controls what we are told and what they (government) wants us to hear. They don't want to cause a total panic with the truth. The only reason the stockmarket is barely hanging on is because the rich and powerful keep feeding it to keep it alive, not thriving and healthy just alive to prevent a panic and sell off. The solution to this mess has always been the housing industry. Fix that and everything else will follow. I have said it for years when you want to question someone defaulting on a home, put them in bankruptcy court and if they follow through then they needed to default-its that easy. Let the bankruptcy judges modify their loans. Do not believe that the interest rates will rise if the banks hand is forced by a bankruptcy judge being allowed to modify what rightfully should. Do you know anyone who is able to get a loan right now? So who cares if the interest rates rise, there going to rise no matter what the banks greed alone will do that not the bankruptcy judge modifications. Common sense for all you non-critical thinkers: why is it that the wealthy can modify their second, third, and vacation homes, their yachts, etc. and yet the poor man can't modify their owner occupied home???? Hello anybody in there??? We need to unite Boston Tea Party and get those crooked politicians out of office so they can't destroy our country anymore. The rich and powerful control mass media, the politicians, heck even the judges. They have so much of their money and their spheres money in the banking system and they don't want to lose a single cent. 4% interest is not enough for them, shoots 5% and even 6% is not enough for their greed. The world is sad especially for the helpless, the poor, and the animals. Keep taking Gods name out of everything and see what we get. His name is Jehovah the Almighty God. His Son is our reigning King and Saviour the Lord Jesus Christ. Pray they help the poor, the helpless, and the animals.

Posted by: bernadette8 | June 25, 2010 4:30 AM | Report abuse

"Big banks and big financial institutions made bad decisions that should have led to their failure. Our wise and benevolent government said that they were too big to fail and bailed them out. Their leaders are again collecting big bonuses.

People who took out mortgages, approved by these big institutions either can't pay the mortgage or find that the house is not worth the cost. The sensible thing is to get out of the house. But since they are not "too big to fail", the government wants to punish them."

Yes, this is and will always be the case. You can complain that FNMA won't be offering comparable deals to every single American homeowner, or perhaps you could support a more limited constitutional government that didn't have the power to bail out large financial institutions or homeowners. Two wrongs don't make a right.

"People I beg you stop blaming your fellow neighbor for the choices they are forced to make or are smart enough to make by running not walking away of a very bad investment."

I don't blame anyone from walking away from an underwater mortgage. It is entirely rational. I just don't get the complaint that these people - who basically got to make a leveraged investment with a massive put option, and their investment didn't work out - aren't going to have the opportunity to get a FNMA mortgage for all of 5 years. It's not like we're throwing them into prison.

"You know what's ironic is that many of you have no problem with corporations walking away from their debts ALL THE TIME. Republicans see no problem with this but become enraged when individual homeowners, who are considerably less well off than the corporations, default on their mortgages. You all are hypocrites."

In a free market, corporations that walk away on their loans don't have the same access to credit as those which maintain their commitments. Despite our bailout culture, it remains the case that you are much better being a borrower with an A or Aa rating that B or Ba. By the way, the income tax system encourages debt financing as interest is deductible.

The issue is bailouts. If you're going to have bailouts, they will preferentially go to the rich, powerful and well connected. In order to buy votes, you might get a token mortgage bailout program for the middle class, but these programs are hard to operate and often little effort is put into them. Over a third of HAMP participants have left the program, more than the number who have managed to have their loan payments reduced. In addition, millions of delinquent borrowers aren't even elligible.

http://finance.yahoo.com/news/Borrowers-exit-troubled-Obama-apf-887634101.html?x=0

Posted by: justin84 | June 25, 2010 9:05 AM | Report abuse

John Galt walks the earth.

Posted by: edmigper | June 25, 2010 4:55 PM | Report abuse

When judging who can afford the value of their mortgages and who cannot, the value of the property is irrelevant. Look at their monthly income, their mortgage payment, and other data such as their debt (other than mortgage) to income ratio to make judgment. It shouldn't be hard to weed out the strategic defaulter.

And Ezra, borrowers do not participate in secondary mortgage market. The GSEs and the banks do. Borrowers participate in primary mortgage market.

Posted by: stoud | June 26, 2010 12:29 PM | Report abuse

jerkhoff: I would like to remind everyone that a mortgage is a financial contract, not a moral agreement.

A worthy reminder. That said, I can't object to the policy. As much as strategic default may be the best choice for the holder of the mortgage, it ain't necessarily the best choice for the rest of us. That the choice is understandable doesn't mean that it shouldn't be discouraged.

Posted by: kpidcoc | June 26, 2010 10:05 PM | Report abuse

All these comments and perceptions are so enlightening to me. While it comes down to dollars and sense each situation can be so unique yet working with a bank can seem so fruitless. Fannie Mae put a notice on my front door today. They now own my home. I guess GMAC said to hell with working on a modification and gave it back to Fannie Mae. I've been trying for 7 months to work with GMAC. I have improved my financial situation sustantially but they offered to short sell my home or hand over the deed, no back monies owed. A sweet deal. But I want to stay to continue to have my son in the same school district for the next 2 years. I have a brother with MS who pays rent, some other help from the family, and now no child support payments. I now make too much money and do not qualify for the Obama plan. While negotiating with the bank they refused any monies I sent. So the debt looks quite large, is ruining my credit, and the stress level is very high. They'll let me walk away yet won't work with me to keep the house? They already have 3 homes in a small subdivision sitting vacant. So ironic to try to do what's right and what I feel morally obligated to do. They don't want my home I know, and they will continue not to receive any money from this home for awhile, but won't give me the opportunity to make good on the only value I have left in my life. Thanks for my rant but the 3/4 hours of sleep since the start of 2010 will continue.

Posted by: rbrewer1 | June 29, 2010 9:04 PM | Report abuse

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