• Lisa Simpson
• Jun 30,2010
• In: Foreclosure

Strategic Defaulters are Making Lenders Anxious and Worried

Fannie Mae and Freddie Mac are in control of 30 million mortgages in the market and any policy they undertake make the experts take note. Recently Fannie Mae has said that it would penalize those who resort to strategic defaults – intentionally walk away from mortgages even if they can afford it. In 2008 September the federal government took over the two mortgage giants.

Chris Dickenson of Federal Housing Financing Agency (regulator of Fannie Mae) gave his support to the policy announced by Fannie that would put brakes on borrowers who purposefully walk away from their commitments.

The details of the plan would be announced by Fannie in July. Those who service the loans of Fannie and collect the mortgage payments will get detailed instructions regarding penalizing the strategic defaulters by filing legal suits against them.

For many others in the mortgage world this move seems like a bad joke. Lou Barnes a mortgage banker from Colorado said, “Fannie wants to lock people up in a jail of negative net worth for much of the rest of their lives. They’re bringing back the debtor’s prison”.

The new measure of Fannie is not without political undertones apart from practical issues. Fannie Mae is under the government but the policy initiated is distinctly at odds with the line being pursued by the Obama government. The latter has been trying to infuse new life into the housing sector by bringing down interest rates, offering tax benefits and making available insurance coverage to millions and millions of fresh loans.

A spokesperson of Treasury Department said the stand taken by Fannie Mae is not representative of the attitude of Washington. A spokesperson of Freddie Mac said it was minutely following the moves of Fannie but had not yet toed this line.

For the last couple of years strategic default has been increasing and causing concern. The lenders observed it first during the early stages of the financial crisis. Towards the close of 2007 Kenneth D. Lewis of Bank of America (CEO) said that people who were not defaulting on their credit cards had started to lag behind on their mortgage dues. The phenomenon caused him to be “astonished”.

The lenders are no longer astonished but they are more anxious. BofA has started placing vulnerable borrowers into affordable repayment plans but even that did not help for a third of these continued to default. Jack Schakett of Bank of America said, “You could say the customer is choosing not to make the payments”.

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