From Fannie Mae today:

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. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.

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. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.

Seven years is up from the typical five Fannie Mae requires in cases of foreclosure, borrowers with “extenuating circumstances” could see that five reduced to as little as two.
Fannie Mae Increases Penalties for Borrowers Who Walk Away [fanniemae.com]
The Rapid Rise Of “Strategic” Defaults [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by Brahma (incensed renter)

    From the press release, linked above:

    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.

    Of which California is not one, so meh.
    The lockout; the “period of seven years from the date of foreclosure” sounds like it’ll be interesting in practice, however because in the real world, the time lag from the NOD to the end of foreclosure is getting longer and longer, so it could end up being more like ten years from the date of the borrower moving out and sending back the keys.

  2. Posted by BobObobby

    Uhmm….
    Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.
    How come when homeowners strategically default everyone cries foul, but when a corporation does it, it’s good business? I cry BS on it all.

  3. Posted by tipster

    This reminds me of high school, when the school whore decided she was no longer going to sleep around.
    That lasted about two weeks.
    I’m sure you’ll be able to default on ten mortgages and they’ll be happy to sign you up for another one, one month later.

  4. Posted by dub dub

    This is really funny — the jurisdictions (or situations) where strategic defaulting makes sense are precisely those which *don’t* allow deficiency judgments.
    So the “toughness” becomes: “We will not underwrite a fake-deadbeat’s loan for 7 years unless there were extenuating circumstances”, which is a contradictory statement (extenuating circumstance => just a plain default, not a strategic one).
    This is an example of austerity that even Paul Krugman can agree with!

  5. Posted by ts364

    The government no doubt recognizes the devastating impact that would result from homeowners that bought during 2003-2008 making a rational economic decision, like BobObobby notes Morgan Stanley made. So even if this has no teeth, as suggested by tipster and dub dub, it sounds ominous. Gotta keep people in the houses.

  6. Posted by A.T.

    Probably an empty threat. But they need to do something to stem the growing tide of foreclosures, which have moved up from the subprime wave. Walk-aways are costing the GSEs (i.e. you and me) a ton of money and adding to the problem of too much housing inventory. If they can convince some small number who might otherwise walk away not to do so, then it will have been worth the price of a press release. Hey, I know a lot of people who should have declared bankruptcy long ago but don’t do so for fear of a bad credit score.
    Note that refis in California are outside of the anti-deficiency statute (for now — legislature is trying to amend that), so a decent chunk of underwater Californians would be subject to this, if there is any teeth to the “we’ll come after you” threat.

  7. Posted by MortgageMaker

    If enforced, simply more work for bankruptcy lawyers.

  8. Posted by sfrenegade

    “If enforced, simply more work for bankruptcy lawyers.”
    I’m not so sure about that. Depending on the metric FNMA uses to determine if someone should have been able to pay, it might be that these people wouldn’t be eligible for bankruptcy protection even with a deficiency judgment. But realistically, they would have to spend a lot of effort collecting on the judgment.
    I think the bigger threat is not being able to get a FNMA-backed loan for 7 years. That would theoretically raise borrowing costs significantly for strategic defaulters. But that doesn’t stop someone from using their cousin, spouse, parent, etc. to apply for the loan.

  9. Posted by tipster

    If you lived in Japan, they would have done you a *favor* by not giving you a loan for 7 years!

  10. Posted by EBGuy

    As A.T. mentioned, it looks like purchase money refies could get nonrecourse (anti-deficiency judgment) status in California.

  11. Posted by sfrenegade

    Thanks for the link, EBGuy. So people who refi-ed would get non-recourse status up to the amount of their original purchase money mortgage, but would have recourse status for any amounts above, according to that proposal. I suppose the rationale is that the people who cashed-out and bought BMWs and fancy vacations (or alternatively paid for their kids college) will only be liable for the excess amount they cashed out.
    But in order to be consistent, people with negative amortization should be liable for the amount of negative amortization, right? Not that I expect the legislature to be consistent.
    Still, it seems a little odd for the legislature to be reforming existing contracts, where banks had all opportunities to assess risks, and borrowers did too. This law should only apply propsectively, if passed.

  12. Posted by BobObobby

    “Walk-aways are costing the GSEs (i.e. you and me) a ton of money and adding to the problem of too much housing inventory.”
    Too much housing inventory is a myth in the bay area…and is only valid in a few places (i.e. Vegas). The natural population growth of the US will be able absorb the inventory easily…in fact some fear we don’t have enough to keep up with population growth rates. The only thing walk aways do is bring prices down to reflect reality.
    The sooner people walkaway, the better – both for society and themselves. Rip the band aid off, instead of peeling is slowly.
    I’d hate to be the sucker “shamed” into paying an $800K mortgage on a property worth $500K. Morgan Stanley isn’t a sucker….

  13. Posted by sfrenegade

    BobObobby, how do you reconcile your suggestion that we don’t have enough housing inventory with price drops and underwater mortgages? That seems to go against supply and demand.

  14. Posted by FormerAptBroker

    Brahma (incensed renter) wrote:
    > The lockout; the “period of seven years from the date of
    > foreclosure” sounds like it’ll be interesting in practice,
    > however because in the real world, the time lag from the
    > NOD to the end of foreclosure is getting longer and longer,
    > so it could end up being more like ten years from the date
    > of the borrower moving out and sending back the keys.
    Moving out and “sending back the keys” is not a “strategic default”…
    Once you decide you are upside down and you are going to take the hit to your credit the “strategic defaulter” will try and stay rent free for as long as possible. A year is easy and with a typical a typical Bay Area mortgage payment and property taxes you will save a lot of money. If you want to get creative and rent a room to a friend or relative (that is legal to do if you own an home even if you are not paying your mortgage or property tax) it is not hard to stretch the eviction date out over two years if your “tenant” fights the eviction.
    http://www.sftu.org/ForeclosureTenantsRights.html

  15. Posted by Rillion

    ” how do you reconcile your suggestion that we don’t have enough housing inventory with price drops and underwater mortgages? That seems to go against supply and demand.”
    It’s pretty easy to make the argument that easy money during the r/e bubble created artificial demand which drove the prices up. Now the government is attempting to keep housing prices from returning to a level supported by the long term demographics in order to aid the banks. So eventually once the economy recovers and prices reach a level consistent with affordability the excess inventory will be absorbed. So in short, its temporary, longer term we need more housing, but in the short run you can still have declining prices as the market corrects from a bubble.

  16. Posted by lol

    Over the whole country, there are much more units than families. Second homes, vacation rentals, abandonned homes. They are not evenly distributed: The BA for instance still has a good level of demand which explains high prices. Go to Maine and you’ll get excellent homes for 5 times less than the BA. Then again, you’ll need a job to pay for that house, however cheap.
    From the demand side, 2 factors will decide on the price of RE:
    - Local salaries and assets. This is directly correlated to the monthly amount a family will pay in mortgage which determines the maximum property price.
    - The level of extra pain people will take when confronted with scarcity: less space, higher debt level, mortgaging the future, deferring family decisions. In SF this level is pretty high.
    The last bubble stretched these 2 factors. Banks relaxed their rules (cramming more debt on the same incomes) and people relaxed their standards (sub-par lifestyle), all for the sake of future appreciation and profit.
    Today:
    1 – Banks have stopped most of the crazy lending.
    2 – People KNOW there is no sure profit in a house purchase.
    This reduces, not demand, which will always be there in the BA, but the capacity to overextend your debt levels. If a family making 150K can buy a 750K home, they’ll think twice before overbidding to 850K. They know these 100K will have to be paid by their salary or other assets. I am talking regular folks with 20% down, not the cash-rich kids who are in an alternate reality.
    In one sentence: permanent short supply doesn’t mean endless increase. Gravity will always apply.

  17. Posted by sfrenegade

    “Over the whole country, there are much more units than families. Second homes, vacation rentals, abandonned homes.”
    Among other things, there are fewer households now too because people have moved in with family, etc.

  18. Posted by Rillion

    Yes but is that a long term lifestyle change for our society or a temporary condition due to the economy? If its a permanent change in how people live, then it indicates a decline in long term demand for housing, if it is temporary then when the economy improves the number of households will increase again and demand for housing will increase as a result.

  19. Posted by sfrenegade

    Rillion, you’re asking the right question.
    I think the debate is still out on whether the changes are permanent or not. Perhaps the question, if many people have been living far beyond their means and have been able to depend on debt to fund their lifestyle, is whether that’s sustainable. I’d come down against sustainability, personally. So I would suggest that the last few years have been a temporary deviation from the course, including, for example, home ownership rates.
    As another example, household income has not done well in recent years either (http://economix.blogs.nytimes.com/2009/09/10/a-decade-with-no-income-gain/), which again suggests the sudden increase in debt and the increase in homeownership were temporary effects.
    Figuring out how this affects the Bay Area is more difficult. Certainly the outerlying areas have a bit more capacity. But much of the core of the Bay Area is artificially constrained by regulations on land use. There is actually a lot of land here that has yet to be used, but large areas are protected, either by law or de facto. But that’s generally applicable to many cities, and not necessarily a unique problem. One of the more approachable papers I’ve seen on this is available at http://www.scu.edu/civilsocietyinstitute/events/upload/SVHousing.pdf
    It would actually be fairly simple for SF to have more affordable housing, but most of the forces in the city work against that. This factor is seemingly permanent until the voters in SF decide differently.

  20. Posted by diemos

    “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.”
    Durn you deadbeats! You’d better keep paying your mortgage or we’re going to put a frowny face sticker on your permanent record.

  21. Posted by Tony

    Fannie Mae is doing the right thing. People should honor their debts and mortgages in order to have the right to make new investments

  22. Posted by sfrenegade

    “People should honor their debts and mortgages in order to have the right to make new investments”
    It’s all fine to be nice and moral, but everything we’re talking about is a contract. If you breach a contract, there are predefined remedies for your breach. Now, it’s fair for an entity like Fannie Mae to say that it won’t buy a loan where the mortgagor is someone who recently breached a mortgage contract, and that’s a fair decision among private parties, but let’s not make this about what people should have the right to do. After all, why should we hold individuals to different standards with respect to contracts than corporations who gleefully walk away from bad CRE investments?

  23. Posted by Rillion

    “After all, why should we hold individuals to different standards with respect to contracts than corporations who gleefully walk away from bad CRE investments”
    Cause corporations have better lobbyists, therefore they get to write the laws that hold themselves to different standards then people that can’t afford to buy off the government.

  24. Posted by sfrenegade

    Exactly!

  25. Posted by jemdad99

    I suspect, and hopefully, Fannie Mae will stick to their guns and not issue mortgages to those who strategically default. Personally I think the ban should be longer, effectively lifetime. Those who strategically default cannot be trusted to pay a loan even if they are able to do so. As one of the taxpayers who is funding Fannie, I prefer to never make another loan to such people again.

  26. Posted by J

    It takes a special kind of idiot to leap from one failed home purchase right into another.

  27. Posted by A.T.

    What I don’t understand is why they’ve limited this policy to those “who walk-away and had the capacity to pay.” Those who simply could not afford the place and thus defaulted are an equally bad (or worse) credit risk. I suppose this is intended solely as a deterrent, and you can’t deter someone who has no choice. But the need to assess “ability to pay” and “good faith” makes this all but unworkable and prone to litigation. Lots of credit dings befall those who act in good faith but default and I don’t see why this should be any different. As I noted above, this appears to be largely a bluff, and they just hope some number of people don’t call them on it.

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