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.