Fannie Mae demonizes the victims of the housing bust

By Felix Salmon
June 24, 2010

When Fannie Mae got taken over by the US government, it became even more of an instrument of state policy than it was before. Today, Fannie Mae and its state-owned brethren (foremost among them Freddie Mac and the FHA) are responsible for funding the overwhelming majority of mortgages in the US: they essentially are the housing market, for most of us. So when it comes to the problems of default and foreclosure, it’s crucial that Fannie Mae be part of the solution rather than part of the problem. Instead, it’s decided to get onto a self-defeating moralistic high horse.

The headline of Fannie’s latest press release says it all. “Fannie Mae Increases Penalties for Borrowers Who Walk Away”:

Defaulting borrowers 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…

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.

This is going to do significant harm, and it’s going to do no substantial good at all. Mike Konczal has an excellent response, as you’d expect: the key thing to note is that Fannie is not proposing the kind of modifications that minimize the probability of redefault — ie modifications which reduce the principal amount outstanding. By encouraging homeowners to modify their loans without reducing the amount they owe or having any chance of having any equity in their homes in the foreseeable future, Fannie is kicking the can not very far down the road, and ensuring that default and foreclosure will be a nationwide problem for years to come.

Meanwhile, when Fannie is presented with innovative ways of keeping homeowners in their homes and saving on substantial foreclosure costs at the same time, it refuses to do so. I make no apologies for the long hyperlink there — this is an important an under-reported story. Rather than do something concrete and positive-sum and helpful, Fannie Mae is happier putting out press releases which talk airily and moralistically about people who walk away from their loans without any visible attempt to define what they mean by that.

Ultimately, of course, this new policy is something of an empty threat in most situations. Is Fannie really going to spend huge amounts of time and money and effort going for deficiency judgments against borrowers who clearly are victims of the housing bust, especially when it’s certain that the money they collect will fail to cover their legal costs? I doubt it. And the refusal to issue a new mortgage to these people for seven years is something of a blessing in disguise, since substantially all of these jingle-mailers will be better off renting anyway.

In fact, it would be quite wonderful if the new Fannie Mae policy created a new class of people who thought that they needed to own their home but who, after renting for seven years, finally work out that it’s a lot less unpleasant than owning, and that maybe they should just continue to do so in perpetuity. It’s not exactly the intent of the Fannie Mae policy, but let’s hope that this misguided idea has some kind of silver lining.

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Comments
13 comments so far

Keep promoting your idea of a rentership society, Felix.

It gives us members of the ownership class a nice underclass to support those of us willing to take over the ‘burden’ of owning! Is being a slumlord kind of like being a feudal lord?

Posted by DanHess | Report as abusive

Assuming that everyone facing foreclosure is a victim of the housing bust is pretty offensive to those of us who bought houses we could afford, with simple, easily understood mortgages, who did not cash out the illusory increase from the bubble, and are now expected to pay for the results. Many of your so-called ‘victims’ of the housing crash are instead contributors to the housing bubble.

Posted by MattJ | Report as abusive

Were I a free market fundamentalist, I’d say that this was actually a positive development, as it promotes what the marketplace is supposed to do: redirect resources away from participants who don’t use capital wisely (in this case: buying an unaffordable home during a asset price bubble) and toward those who will use capital wisely (people who avoided buying homes during the bubble, when it was obvious to any reasonable person that prices had appreciated substantially over the level called for by the fundamentals).

Mortgage “modifications which reduce the principal amount outstanding” would reward those who took part in the bubble and who essentially bet on wild unsustainable asset prices appreciation, and harm those who deliberately avoided taking out a mortgage on an overpriced asset and conservatively invested their capital, saving up their down payment money, patiently waiting for prices to come down to a reasonable level. There’s just no good economic rationale for doing that.

Posted by Strych09 | Report as abusive

The first part is silly. There’s no point holding a grudge against people who did what they were entitled to do under the conditions of the loan.

The second part about collecting money where the jurisdiction allows, is what any bank would do. I believe Felix is on the board of a credit union? What position do they take when people owe money they can afford to pay but don’t want to? I might be in the market for a loan!

Posted by Mr.Do | Report as abusive

Felix wrote:
“So when it comes to the problems of default and foreclosure, it’s crucial that Fannie Mae be part of the solution rather than part of the problem. Instead, it’s decided to get onto a self-defeating moralistic high horse.”

Why is the concept of ‘If you don’t pay me, I won’t lend to you again’ moralistic and not just pure capitalism and rational economics?

Oh, wait, it is capitalism and rational economics; it’s just oblique and further down your discussion:

“And the refusal to issue a new mortgage to these people for seven years is something of a blessing in disguise, since substantially all of these jingle-mailers will be better off renting anyway.”

Look, I don’t like Fannie anymore than the next guy. But creating penalties for violating financial contracts is an economically rational reaction to borrowers who don’t pay. You are now starting to see the ugly side of encouraging ‘jingle mail.’ And expect more.

Posted by AABender1 | Report as abusive

Fannie Mae’s role in the economy is chiefly about federalizing the downside to bad bets made by private speculators – using taxpayer funds to pay them out at full pop. Which would be bad enough. But wait, there’s more…

When Fannie starts using federal muscle to remove en masse and without regard for specific circumstance those caught in the middle from the credit gene pool, forever, it’s a double whammy to free market economy principle: guaranteed to produce results which are, in the long run, overwhelmingly perverse.

It also lends credence to the tea party world view of what government can do when it sets its mind to it, namely carry the can for grand theft US Economy after the white-collar perps have had their way with it.

Posted by HBC | Report as abusive

Fannie Mae collapsed insolvent, and we the taxpayers own it. Fannie Mae policy is public policy, not private enterprise. As a matter of public policy, I can think of a hundred things I would have FNM do before chasing these paltry few ducats.

@DanHess, I wish the government were spending $2 trillion per decade subsidizing my lifestyle, too. I salute you for your superior ability to leach from the public teat. Cf, those few who don’t know the numbers, page 33 of jct.gov/publications.html?func=startdown &id=3642

Posted by wcw | Report as abusive

Mr.Do wrote:The first part is silly. There’s no point holding a grudge against people who did what they were entitled to do under the conditions of the loan.I don’t agree that it’s silly or that is just “holding a grudge”.

What it is, really, is not allowing somebody who strategically defaulted to do so again on the taxpayer’s dime. If the person is truly credit worthy and strategically defaulted on their previous mortgage, then of course when they want another loan they are free to get one from a private portfolio lender.

The principle is “Fool me once, shame on you; fool me twice, shame on me.”

Posted by Strych09 | Report as abusive

Felix,

Wow… wow… wow… Fannie and Freddie’s sole goal… THE ONLY THING THEY NOW DO… is transfer wealth from tax payers to home buyers via an explicit subsidy that lowers the cost of borrowing.

And you’re problem is that they go after the deadbeats that don’t pay?

How about this Felix… let’s let the goverment keep artifically lowering the cost of home ownership… but lets also make it less dangerous for the tax payer. You frequently advocate raising capital standards for banks, (a GREAT idea!) How about we raise the capital standards for home owners… we’ve effectively gone from a requirement of 0-5% in 2007 to 20% down in 2010 (with a few exceptions for first time buyers and veterans.) Lets keep walking that number up gradually… 21% down in 2011, 22% in 2012 and so on until the required down payment for an agency backed loan is 25%.

That would not crush prices the way the massive move from no money down to 20% down did, it would keep prices from rising rapidly back to unaffordable levels, and it would even allow banks some room to think about offering a non-goverment backed option to consumers who had the 20% down but did not want to wait the extra year to save the final 5% needed to get to that goverment mandated 25%

Just remember that even post crash the value of Americans homes represents somethin like 75% of the total wealth in this country. Owning a home is a forced savings plan. Even if the rate of return is negitive you end up owning something of value at the end of 30years. Renters better be real diciplined with their 401k’s and IRA’s if you think they are going to come out ahead in th end!

Keep up the great writing!

Posted by y2kurtus | Report as abusive

wcw, we as taxpayers do not own Fannie and Freddie; we have agreed to guarantee their losses through the end of 2012 (iirc). I for one sincerely hope after that point we let the Fannie/Freddie bondholders take the losses they so richly deserve. Any politicians who agrees to back the full agency debt will be ending their career, and will deserve much worse than that.

Posted by MattJ | Report as abusive

@MattJ, yes, FNM technically is in conservatorship. Nonetheless, we fund it. Absent said funding, it would not exist. Hence, it is accurate to describe its policy as public policy.

As for GSE bondholders, that ship sailed with the conservatorship. I’d estimate the chances are higher that the preferreds starts paying dividends again than that we cram down bondholders for so much as a nickel.

Posted by wcw | Report as abusive

Felix, WCW –

Let’s keep in mind why Uncle Sam decided 70 years ago to subsidize homeownership.

The thing is, evidence over the previous several thousand years strongly suggested that renters filled the ranks of the underclass and were lorded over by the owning class. My guess is 100 years from now, and 500 years from now, the underclass will still consist largely of renters.

Felix, I’m sure its nice to sit on your chair-ball in your purple suit in your NY office and talk about the joys of renting but if you could go back two generations and chat with a sharecropper, you’d see some of the upside of ownership. It’s kind of ironic how you equate freedom with renting rather than with owning.

Posted by DanHess | Report as abusive

I shake my head too. There are still people who enjoy their homes even more, knowing paying for it isn’t money with wings. (like monthly rental versus monthly payments)

I think Felix, you are feeling for those who can’t afford to make monthly payments but wish to keep their homes? Well in that case, if Fannie is not doing what they can, then you are right … they will make more problems.

But being they were referring to “Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith”, dang straight there should be something done to deter walking away/being able to get future loans it will be en masse zombie land once word gets round they can “do” that!

Posted by hsvkitty | Report as abusive
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