It’s not hard to understand the motivation behind Fannie Mae’s announcement that they intend to punish homeowners who walk away from their underwater properties – they got out the stick since the carrot didn’t seem to be working – but they clearly haven’t thought this all the way through as detailed in this report by David Streitfeld in the New York Times.
Fannie Mae’s decision to begin punishing people who walk away from their unpaid mortgages could prove difficult to sell to the public and might be impossible to execute, housing and lending experts said Thursday.
The big mortgage financing company, which owns or guarantees millions of mortgages, announced on Wednesday that it would sue homeowners who have the capacity to pay but default anyway. It also said it would prevent these strategic defaulters from getting a new Fannie Mae-backed loan for seven years, which could potentially shut millions of buyers out of the market.
But it was unclear, the experts said, why Fannie Mae was threatening delinquent owners and what it hoped to achieve. The new direction seems to run counter to the Obama administration’s efforts to reinvigorate the housing market. And there were basic questions about how Fannie would be able to distinguish between those homeowners who defaulted intentionally and the unfortunate ones who had no choice.
“How are they going to do this, and for what result?” asked Grant Stern, president of the Morningside Mortgage on Bay Harbor, Fla. “So they can find the people who have a little money left after their house crashed and take it away from them?”
Fannie Mae will soon reveal more about how they plan to collect the data needed to make the determination about using their big, new stick and may even say how many lawyers they expect to hire. As noted here yesterday, in my view, this could be the final nail in the coffin for the late, great U.S. “ownership society”. Colorado mortgage banker Lou Barnes puts it a little differently, concluding, “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.”
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Would Fannie Mae still exist in 7 yrs as we know it today? I wouldn’t take their threaten too seriously.
It’s so easy to get the media to push out their scare tactics for them. This is all talk. Any examples of people with deficiency judgments to date from other lenders?
Favored institutions everywhere are still sitting on huge piles of paper (sovereign debt, mortgage paper, etc.) that are going to take a giant hit as austerity programs, strategic defaults and similar gather momentum. Their strategy is to slow that process as much as possible and unload the junk onto whoever they can. Effectively, it is a global run on the bank system as the fraud of fractional reserve lending (leverage) has been revealed. That’s why we have the Obama and Krugman loudly serving up the Keynesian Koolaid. As far as the mortgage paper is concerned, they try first to support prices and now also targeting defaults directly.
They won’t be suing anyone in a state that prohibits pursuit of deficiencies after foreclosure sale. For instance, in California, the lender generally pursues one action, either judicial or non-judicial foreclosure. The latter is quick, and allows a fairly easy assumption of the collateral real estate. The former takes years, during which time they do not have the collateral. Generally, only VERY large deficiencies make the former a reasonable course of action.
So this is just a bunch of hot air…for most jurisdictions. Now if you happen to be in Virginia…for instance…you might have a problem.
Don’t pay your credit card and see what happens. Is the credit card suing you for the balance due “punishing consumers” ? Maybe we should eliminate going after those debtors.
Go hire a service to do work at your home. Then don’t pay. When they sue you or put a lein on your property is that “contractors locking up people in a jail of negative equity” ?
Quit paying your car payment because “I’m upside down and it will be years before I have any equity in it”. They take your car, sell it at auction, and come after you for the deficiency. But wait…let me guess, they’re “denying Americans the right to drive”, right?
<> Does this in any way imply that they are going to make little old ladies starve or put poor people in debtors prisons?. No, it just means they’re not going to be as big of suckers as some out there want them to be.
<> Who here thinks people who don’t honor their debts make good future loan risks? What kind of bizarro world do we live in where you not only get to screw the taxpayers with your bad business moves, you get to demand to do it over and over w/o limit? “Wah, I want a do-over. Make them give me one”.
Renting. That’s the solution. If you can’t hold a job during a downturn, can’t manage to save enough to have a reasonable loan/value ratio, can’t afford to buy w/o spending some outrageous amount for a dump that you know really isn’t worth it. Then just rent. Or move. There are cafeteria ladies and farmers’ helpers who don’t make squat somewhere living in modest homes and they are doing just fine. The home they live in you’d turn your nose up at. But they can manage it. Just because you had to live in a “nice” place in yuppieville 20 min from work in the trendy area doesn’t mean that cafeteria lady has to pay when you bail. The average home size in the US has nearly doubled even though family size has gotten smaller. Is a media room now a constitutional right or something?
Grow up America. Learn your lessons. You got greedy, you got stars in your eyes about living life like the Carringtons (see 80’s tv), even though you were living paycheck to paycheck, and didn’t bother to learn anything about how housing markets work. You just signed some papers, moved in, and expected to make money.
Well, when the currency collapses in future years due to EVERYONE being bailed out somehow in every phase of their lives, maybe it’ll finally sink in. TANSTAAFL.
nice rant. though, you can’t entirely blame the dog for over-eating if you continue to offer it food. the root cause is a system of ‘free’ lunch for bankers and cronies at the expense of everyone else.
To a certain extent, I agree with you. If you bought a home and you really thought it was a million-dollar house and now the housing bubble burst and you’re realizing how screwed you got, that’s your fault. You shouldn’t have bought a million dollar home.
I also agree with the premise that overall house sizes are getting too big and people are too quick to turn their nose up at a decent place.
But some people got screwed by the banks, and they don’t deserve to be thrown into debtor’s prison. If this policy only affects those people who actually have sufficient income and net worth to make their mortgage payments, then I am all for it.
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