BluefoxToday blog : Fannie Mae's new strategic default rule could amount to very little

Fannie Mae's new strategic default rule could amount to very little

Living roomFannie Mae recently took an assertive step, in its own mind at least, to stem the growing tendency of mortgage borrowers pulling off strategic defaults. In that homeowners who could afford their payments choose to walk away from the obligation anyway. The GSE went ahead and added another category to the new policy. Home loan recipients who fail to do a workout in good faith also fall under the spell of its new guidelines. What this all means is that property owners fitting these parameters would be ineligible for mortgages backed by Fannie Mae for seven long years from the recorded foreclosure date.

Strategic default entered the already crowded mortgage and real estate vocabulary just recently when the ever thinner-skinned housing bubble couldn't hold on any more worthless air and popped. The event sent property values on a long skid toward the beckoning abyss and in the process wiped out equity in numbers not seen in modern times. Eventually home prices sank below the underlying mortgage balances and to the utter horror of observant homeowners just kept on going down, spawning the unpleasant designation for the phenomenon; underwater. And those underwater on their mortgages are prime candidates for a strategic default.

Right now Fannie Mae controls a decent chunk of the mortgage market and that gives its policy adjustment some teeth. Yet, as government-affiliated home loan providers today just about completely dominate the housing finance arena, no one else has thus far followed suit. Freddie Mac and FHA are the other major performers and predictably will then attract with their less restrictive rules much of the business Fannie Mae will be turning away.  

The private home loan sector is still struggling to rise from the ashes, but when they do so Fannie Mae's policy is bound to lose even more of its bite. Mortgage applicants - with strategic default/ foreclosure on their record - with down payment funds and solid income will be shopping for the best deal and private mortgage lenders with their innovative minds are certainly going to find a way to accommodate this specialty slice of the real estate market pie.

As things stand, Fannie Mae's policy change seems to hold minimal deterrence power for homeowners contemplating to go for the now notorious strategic default. People simply have too many options besides Fannie Mae to look at.

_______________________________________________________________________________

Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

eskokiuru@gmail.com
My cell: 702-499-1006

Comment balloon 46 commentsEsko Kiuru • July 30 2010 04:05PM

Comments

Esko,  Your predictions may be correct....I can't say at this point.  Watch your calendar for Aug. 17 when the hearings start about what to "do with" Fannie and Freddie.  I suspect the "do with" will not be much....the facts are on the table that the entities are not really working, but I think politics and job security will win the day.

I don't, however, think either GSE will hold the clout they once did. 

Posted by Deborah "Dee Dee" Garvin, C2 Financial (C2 Financial) over 7 years ago

Home owners who default are fully aware of the risks and penalties.  They're willing to take their lumps.  What Fannie seeks to do in view of it's miserable failure at loan modification is force American home owners to accept the burdon of paying for a property at twice it's value and thereby stripping them of the ability to manage their remaining assets with any independence. 

It wouldn't surprise me if the final judgment if a borrower defaulted and couldn't repay the deficiency is a criminal prosecution.  That's the governments last ditch way of citizen control. 

 

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate) over 7 years ago

Esko they may have other choices right now but as the foreclosure option is ABUSED by those who choose to default on their mortgages, not out of necessity, but out of choice, and Freddie Mac, and FHA start feeling more of the pinch from that, they will follow suit or at least move closer to it.

As I have said before, I do not have any sympathy for those doing Strategic Defaults.  They are making it more and more difficult for those that actually need to default, and it is those homeowers that will actually be the victims of all this in the end.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 7 years ago

I feel this will not hurt the people they want it to.  The ones who lied, cheated and did whatever to get into a house they could not afford.  This will hurt the ones who genuienly are in trouble, it is the government for gosh sacks.

Posted by Kelly Muscarella, Turning your dreams into Realty!! (Premiere Property Group, BG, LLC) over 7 years ago

I know many homeowners who got verbal rejections on the phone that their lender/servicer would not work with them on a loan modification. Also, I know just as many borrowers who spend months waiting for an answer on a loan modification and they finally just give up and do a short sale or the bank automatically forecloses during the "process." How will Fannie Mae prove that the borrowers didn't try to work out a payment plan? I guess the thing for all borrowers to do is send a certified letter to the lender/servicer asking for a loan modification and keep that as proof that they tried but the bank ignored them.

Posted by Shari Posey (Berkshire Hathaway HSCP) over 7 years ago

Let me preface this comment by stating I disagree with individuals who take the strategic default option.  What I find interesting is the dichotomy in our economy and legal system as it relates to strategic defaults.  Corporations who "strategically" default, continue on their merry way without much of a hiccup or consequence.  The CEOs and BODs of these corporations actually tend to receive enormous bonuses for effectively navigating their strategic default.  To Lenn's earlier comment, they are congratulated for effectively "managing their resources."

However, individuals/homeowners who attempted to do the right thing (especially those who over the course of this downturn) but can no longer absorb the indirect costs associated with a failed asset (e.g. can't relocated for a new job, can't refinance at historically low interest rates, can't sell the asset as it won't appraise, etc.) are held up for scorn and ridicule.  It is a very interesting double standard we appear to operate and tolerate in this country.

This is all the more interesting (and frustrating actually) when the major players creating the situation we are engulfed in right now (Goldman Sachs, Bank of America, et. al) paid themselves billions in bonuses for effectively playing both sides against themselves (utilizing hedge funds to bet against the real estate market while promoting and aggressively issuing sub-prime loans).  Gotta love our form of capitalism.

6

Posted by Craig Frazer, Real Estate, RE/MAX Metro, Davis & Salt Lake County over 7 years ago

Hmmm... I wonder if Fannie is at least willing to credit strategic defaulters for the money they paid as taxpayers to bail out the financial institutions? That should count for something, right?

Posted by Bill Burchard, Broker, Realtor, Representing Buyers and Sellers (3B Realty: 951-347-3818, CA) over 7 years ago

Whatever happened to Consumer Responsibility? Everyone wants to blame the Bank and no one seems to want to blame the consumer. I'm an agent for both Freddie & Fannie and I can assure you that although many would like to believe these consumers are being mistreated and unfairly persecuted for whatever tale of woe they have I can assure you 9 out of 10 times they're NOT! I've had 2 people during a cash for keys that I genuinely felt for and both of them were more civil and relaxed about the whole ordeal then any of the others I've ever dealt with. 1/2 these people were flipping houses on partial-interest only payment with arms and another 1/4 were overextended. 1 person when they thought they were going under went out and purchased 2 motorcycles, Seadoos, and a new truck because "If my credits going to be bad for the next 7 years I'll get these now while I still can"... And you want me to feel sorry you?!

You can only blame the Banks and credit card companies for so long, but at some point there has to be accountability by the consumer for not reading their contracts, not asking questions when they didn't understand, and for not being responsible. It's like a fat person suing McDonald's because they made the food "Too Accessible"... Really? Give me a break... And yes I called him fat because an obese person wit a condition would realize their issues and take steps to help themselves in a healthy manner rather than gorging themselves on food they know is unhealthy even without the calorie count on the menu. It's not rocket science people...

For those that don't know. Fannie Mae recently has started a trial program of offering "Cash For Keys" to borrowers that are in a pattern conducive of default for "Deed in lieu of Foreclosure" which has a significantly less credit impact. It would help though if consumers would open their eyes to the reality that they're over-extended and instead of disillusioning themselves with the thought that the market will go 180 and be 2005 again they took control of their impending futures and worked towards an amicable solution rather than burying their heads in the sand until it's too late. All this talk of loan modification and how it doesn't work... It's like the government trying to repair social security. If you know it's not working then maybe you should look for other solutions rather than still going after the same program and constantly whining about how it doesn't work...

If you can make your payments but choose to walk away then you should be held accountable if for anything to at least provide justice to those that can't make their payment because tragedy actually did befall them and they were actually in an undeserved situation.

Rant over... lol

Who said Foreclosures were stressful?

Posted by Nick Setting (Coldwell Banker Bain) over 7 years ago
Esko, wow a seven year ban, even for them it has some teeth in it!
Posted by Gary Woltal, Assoc. Broker Realtor SFR Dallas Ft. Worth (Keller Williams Realty) over 7 years ago

The pattern is the same. . there is a self imposed moral obligation instigated to homeowners with mortgages underwater.. .yet the banks continuously have shown their morals to be in line with the recently departed BP oil executive. .Their lavish bonuses and salaries have not gone unnoticed.

As soon as a group attempts to do the right thing, others will not and there is really no answer to this except. . ..let the market fall where it belongs.

Let the new consumers of the future decide this.

We were part of a Sodom & Gomorrah Real Estate era. . .

. . .the party is over

. .and a new market will not begin . .

. . until the last strategic default is processed!

Amen

 

Posted by Fernando Herboso - Broker for Maxus Realty Group, 301-246-0001 Serving Maryland, DC and Northern VA (Maxus Realty Group - Broker 301-246-0001) over 7 years ago

Powerful post, and comments.  And let's not forget those people who bought their homes at the then current market value had no idea of the future property drops.  With interests rates low, they can't even afford to re-finance due to the value of their property just not being there.  Banks were bailed out in similiar fashion when they, all of a sudden, had no ability to repay their debts.  They (government) used taxpayers dollars for the bailouts/bonuses.  Treading water while the house is underwater makes no sense to many.  I've actually heard loan officers tell people, "Oh, you can refinance in a year and get rid of the second . . . "  Yes, as Deborah #1 writes, let's watch the hearings . . .

Posted by Carla Muss-Jacobs, Principal Broker (503) 810-7192, Buyer Focused ~ Buyer Results (BuyersAgentPortland.com | Portland Metro Exclusive Buyers Agent | 100% Buyer Representation ~ 100% of the Time) over 7 years ago

Interesting take on the situation Esko.  I think you are correct in that it is not going to deter strategic defaults.

Posted by Harj Gill, As featured on NBC's "Saving You Money" (Speed Equity®) over 7 years ago

The steps that the large lending entities are taking to "fix" the problem only illustrate why the problem is here to begin with. They can't fix what they broke.

Consumers and institutional investors were sold a bill of goods. People who borrowed in good faith and then lost their jobs are legion. I have no sympathy for the lenders.

Posted by J. Philip Faranda, Broker-Owner (J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY) over 7 years ago

7 years! This is ridiculous isn't someone from the NAR advising them? ha yea right.

Posted by Lane Midgett (1776 Real Estate Group Richmond, VA Local Expert ) over 7 years ago

this is great news... if we stop bailing people out and let the market take the risks that it ought... capitalism and sink or swim....

 

let's get back to teach a man to fish vs give a man a fish

Posted by Vince McEveety (Gilleran Griffin Realty) over 7 years ago

A very interesting discussion.  I guess we will have to see how all of this plays out in the next several months.

Posted by Joan Whitebook, Consumer Focused Real Estate Services (BHG The Masiello Group) over 7 years ago

Esko - I have to say, I agree with your comments.  Lenders are ever so willing to be creative when they can be.  I think it will be hard to prove strategic default simply because who can define someone "who can afford it".  It would take an audit of their finances and all situations would have to be considered before determining if someone was "capable" of paying.  It's a desperate attempt by Fannie to stop strategic defaults because they know they have no recourse.

Let's take an example:  Someone is 200,000 underwater.  200,000 divided by 7 years = 28,571.43 per year of waiting.  Not a bad paycheck for walking away if you will.

 

Fannie-  I think you are all bark and no bite.  Prove these people couldn't afford it!  How much will the legal fees be to prove it?  What about counter lawsuits for discrimination?  Great post!

Posted by Nevin Williams, Raleigh Mortgage Pro (Sierra Pacific Mortgage Raleigh) over 7 years ago

I'm all for the homeowners, who have tried to get their banks to mod their loans and then received nothing but deafening silence in return, to take the step of strategic default.  Perhaps it will raise the awareness that the HAMP and HAFA programs have been nothing but utter and complete failures, and that the banks need to be forced into working with their borrowers. 

If the gov't won't force lenders to work with homeowners, the banks won't do it of their own accord and so they should be forced to face the consequences - massive numbers of REO properties sitting on their books for years to come.

After that, let's see if the banks continue to pay the massive executive bonuses with nothing but demand deposit money.

-TMC

Tim Cahill
MBA, Certified EcoBroker, Realtor
Web site: CyberGreenRealty | Blog: Home Green Home
T: 617.599.2775
E: timcahill@avenue3re.com

Posted by Tim Cahill, MBA, EcoBroker (RE/MAX Results) over 7 years ago

Hi Esko -- I would imagine this new rule will have an impact, if owners are made aware of it, for better or worse. 

But I think it highlights the fact of the completely failure of the existing programs in place already, so I think they should start earlier in the process and fix those programs before going after the tail end.

Posted by Chris Olsen, Broker Owner Cleveland Ohio Real Estate (Olsen Ziegler Realty) over 7 years ago

It'll be interesting to see how this works out - it may be years before we'll see the full extent of this mortgage meltdown.  Financial institutes and wall street need to be held accountable to their investors and customers.  Regulations need to be tightened on these entities.

Posted by Rita Gibbons, The Gibbons Group (MacDoc Realty LLC) over 7 years ago

At the end of the day we will all make decisions which are in our own best interests and the interests of those we care for.  Strategic Defaults are not exempt from those decisions.  In order for the house of cards that we call Capitalism that I fully participate in it is necessary for those who can pay to pay, however if those who can pay choose not to pay the house of cards starts to crumble.  The house of cards started to crumble originally because those who couldn't pay to begin with were given homes with pieces of paper called mortgages.  When they couldn't pay those who could pay started to feel the pain.  Now those who can still pay are starting to say, "The hell with it."  I'm tired of doing "the right thing"...  Its time to get off this marry-go-round and retain some of the financial dignity that I have left before the entire house of cards comes down and I'm the only one left continuing to play the game.

Posted by Glenn Sanford (eXp Realty & Working The Magic, LLC) over 7 years ago

How is Fannie going to prove strategic defaults, I wonder?  Because a borrower didn't go through HAMP or HAFA that will determine they're a strategic defaulter?!  There are other ways to do a short sale other than HAHA, and as you say, too many other options besides Fannie Mae.  They're the next to go down anyway so it won't matter.

Posted by Pamela Seley, Residential Real Estate Agent serving SW RivCo CA (West Coast Realty Division) over 7 years ago

Thank you!

Posted by Young-Jin Yang (Keller Williams Realty) over 7 years ago

Deborah,

Those hearings ought to be fun to watch as sparks fly over what to do about them.

Posted by Esko Kiuru over 7 years ago

Lenn,

Dealing with the deficiency issue is going to be a big thing in the coming years.

Posted by Esko Kiuru over 7 years ago

George,

To make this policy more meaningful at least Freddie and FHA ought initiate a similar rule.

Posted by Esko Kiuru over 7 years ago

Kelly,

You make a good point.

 

Shari,

To cover oneself everyone should use certified mail when dealing with lenders and servicers on workouts etc.

 

Posted by Esko Kiuru over 7 years ago

Craig,

Your point about double standard is well taken, and supported so nicely by events of the last few years.

Posted by Esko Kiuru over 7 years ago

Nick,

Looks like both sides, consumer andlender, could've been more responsible before the roof caved in.

Posted by Esko Kiuru over 7 years ago

Gary,

It went up to seven under the new policy, a long time.

Posted by Esko Kiuru over 7 years ago

Fernando,

Strategic defaults probably will be with us for a good stretch.

 

Carla,

One of the tragic consequences of being underwater now is not being able to refinance to these deliciously low rates.

Posted by Esko Kiuru over 7 years ago

Harj,

Fannie going alone is just diverting business to the other organizations and private lenders.

 

Philip,

Would be nice to see the biggies doing more to fix this situation.

Posted by Esko Kiuru over 7 years ago

Lane,

Thanks for stopping by.

 

Vince,

We ought to streamline our variety of capitalism to better meet future challenges.

Posted by Esko Kiuru over 7 years ago

Joan,

Thanks for coming by to comment.

 

Nevin,

Exactly, it's a hornet's nest to try prove strategic default in most cases.

Posted by Esko Kiuru over 7 years ago

Tim,

Many lenders haven't been as open to workouts as you would expect, despite the government's urging.

Posted by Esko Kiuru over 7 years ago

Chris,

If owners do their homework they'll know soon enough that they have other options.

Posted by Esko Kiuru over 7 years ago

Rita,

Looks like the new Wall Street Reform legislation just passed will tighten things up, long overdue by the way.

 

Glenn,

Some valid points you make there. Strategic default is something borrowers need to think carefully about before making any decisions.

Posted by Esko Kiuru over 7 years ago

Pamela,

Precisely, homeowners as of right now have quite a few other options, so Fannie's rule won't have much impact.

 

Young-Jin,

Thanks for stopping by.

Posted by Esko Kiuru over 7 years ago

First of all I want to state this... not everyone who is upside down used their home as an ATM as many continue to remind us just as the agent for Fannie/Freddie above claims...

I attended the NACA meetings at the DC Convention center last week. I closely monitored several clients who were looking for help. I visited the Fannie Mae table with a client who explained they have attempted to contact their lender for the last two years. They explained to Fannie that paperwork that was signed for by FedEx was lost multiple times, fax confirmations were claimed to have never been received, income used for loan modification was calculated incorrectly and on and on and on... we all know the horror stories...

I asked the rep from Fannie why they have not policed investors more and held them accountable for not following guidelines set forth by the government with programs such as Making Home Affordable and HAMP. After all, Fannie is the one who is responsible for these loans, the lenders are simply the servicer. 

The response from Fannie --  we leave it to the lender to handle how these loans will be handled....

I also asked the Fannie rep about the new strategic default rule that allows them to pursue any unpaid balance and restricts lending to them for 7 years. I asked them what the difference really was between a strategic default and a short sale or foreclosure. I got a blank smile....  I asked again, if a homeowner attempts to negotiate a short sale but the bank refuses to communicate or takes forever to approve a contract, what really is the difference between a foreclosure and a strategic default.... again... blank stares.....   

The programs created by the government is nothing more than posturing... do you realize what percentage of American consumers are getting help?

Here is a question for all....   As more Americans either default or get foreclosed and these homes do not sell, Fannie and Freddie and banks will eventually run out of money yet again as the revenue from these properties stop. At some point they will yet again need to be bailed out... and one could say... tap the United States Government's ATM machine once again...   what happens then...

For everyone who continues to point fingers and blame as opposed to focusing on how to cure the issues at hand really should understand the facts. Most homeowners who are underwater were responsible borrowers who have been crushed by declining property values and unemployment/loss of income...

Watch for my post on the NACA conference in DC and how the lenders and GSE's who attended the meetings handled themselves. I was truly disgusted to be an American....   

Posted by Lewis Poretz, Mortgage Loan Officer - Lending in 50 States (Bank of England Mortgage) over 7 years ago

@Lewis... I never said the bank wasn't irresponsible and shouldn't be held accountable. I am saying that every time I turn around there are more and more agents wanting to place all the blame on the banks and none on the consumer. And I don't make claims that people were using homes as "atms"... I know it as a fact since I'm the one selling the 1/2 flipped jobs...

Posted by Nick Setting (Coldwell Banker Bain) over 7 years ago

Lewis,

Good commentary and the paragraph just before the last paragraph should speak for itself.

Posted by Esko Kiuru over 7 years ago

I second the notion about Lewis' comments!  We are seeing some areas of the Vegas Valley roll back to mid 80s prices. 

I wish there could be a band aid solution for this but the cut is entirely too deep.

Posted by Renée Donohue, Las Vegas Real Estate Broker - www.urLVhome.com (Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate) over 7 years ago

Renee,

Going back to the 80's prices spells for a serious erosion that will take a while to correct.

Posted by Esko Kiuru over 7 years ago

Homeowners need to understand all of their options.  For those that are considering a strategic default, they need to seriously look at principal reduction options

www.MortgageNoteReduction.com

Posted by MJ Anton over 7 years ago

MJ,

Homeowners fully understanding all the options is vital in this market.

Posted by Esko Kiuru over 7 years ago

Far too many homeowners just walk away from the property and the mortgage, only to learn later that they should have done their homework and considered a short sale.

Posted by Tony and Suzanne Marriott, Associate Brokers, Serving Scottsdale, Phoenix and Maricopa County AZ (Haven Express @ Keller Williams Arizona Realty) about 7 years ago

Participate