Just walk away and there will be an end to the horror. I await your answer.

July 1, 2010 10:43 AM

Mortgage financing giant Fannie Mae announces policy changes designed to encourage borrowers to "work with their servicers and pursue alternatives to foreclosure"...and threatens borrowers with new penalties for strategic default.

From the Fannie Mae press release:

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.

"We're taking these steps to highlight the importance of working with your servicer," said Terence Edwards, executive vice president for credit portfolio management. "Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time."

Meanwhile, a recent study (summarized by the Wall Street Journal) suggests that nearly 1 in 5 mortgage defaults through the first half of 2009 were strategic.

From the New York Times:

-Fannie and its sister company, Freddie Mac, control 30 million mortgages, providing liquidity to the housing market. They have been under government conservatorship since September 2008; the ultimate cost of the rescue to taxpayers might hit $400 billion.

-About a quarter of homeowners with mortgages, or about 11 million households, owe more than their home is worth, and are potentially vulnerable to a strategic default

-[Fannie Mae]’s delinquency rate, traditionally about 0.5 percent of its portfolio, began sharply ascending in mid-2007. At the beginning of this year, it leveled off at 5.5 percent.

posted by 2bucksplus (44 comments total)

So when homeowners walk away from an underwater property, they are penalized and become ineligible for a FM mortgage for several years. When a corporation walks away from an underwater property, it's just chalked up to "good business sense"? Sure, there were a lot of people buying homes that had no earthly business buying homes, but this still feels like the scales just got tipped a little more against the people and in favor of the banks. :(
posted by xedrik at 11:02 AM on July 1, 2010 [12 favorites]

Since Fannie Mae is the single largest source of mortgage finance in the US, this is a big deal.

It's also worth pointing out that the US government is now the single largest provider of money to buy houses, has a powerful interest in keeping house prices up, and is the source of all dollars. If that conflict of interest doesn't terrify you, it should.

"Strategic default" is absolutely within bounds. It's in the contract that was signed; you make the payments, and keep the house. If you stop making the payments, you surrender the house -- and in no-recourse states, that's as far as it goes. FNM is trying to retroactively change the rules, and force you to work on their behalf, even if you have no chance of ever profiting from the arrangement.

I can guarantee you that no such rule changes would be made in reverse. For the last thirty plus years, if you were the one in trouble, they'd show up with the sheriff to kick your ass out.

But exercise YOUR half of the contract, when it's to your benefit to do so, and they'll do their best to fuck you.
posted by Malor at 11:06 AM on July 1, 2010 [31 favorites]

more likely to be hurt by this, i would think, are real estate speculators who made bad bets and people who bought second homes that they now see as more of a financial liability than an asset.

the whole point of these measures is to penalize people who could actually afford to continue making their mortgage payments, but who've decided to take a calculated loss in order to improve their personal portfolios (and so, presumably they have the luxury of other options).

I'm not going to lose a whole lot of sleep over that, personally.
posted by saulgoodman at 11:11 AM on July 1, 2010

But the risk of speculators and 2nd-homers walking away is priced into the contract. All those people paid for the contractual right to walk away. Don't let your antipathy toward these types cloud the reality here - this is the extremely powerful state changing the rules; to ensure the less powerful can't exercise their bargained-for rights (really Malor said it better).
posted by r_nebblesworthII at 11:15 AM on July 1, 2010 [3 favorites]

What happens after foreclosure is not part of any mortgage contract that I know about. I agree that exercising an option implicit in a mortgage contract is not immoral, but one should not expect that to be without consequence. Would you expect to be able to quit a job after one week and expect the employer to rehire you on your own terms? Alternatively, would you loan your own money to someone who defaulted on a previous loan?
posted by saeculorum at 11:18 AM on July 1, 2010 [2 favorites]

"Strategic default" is absolutely within bounds. It's in the contract that was signed; you make the payments, and keep the house. If you stop making the payments, you surrender the house -- and in no-recourse states, that's as far as it goes. FNM is trying to retroactively change the rules, and force you to work on their behalf, even if you have no chance of ever profiting from the arrangement.

I agree that strategic default is a valid option for some people and that the usual moral arguments against it are hypocritical coming from banks, but this doesn't seem like changing the rules to me. People who default on a mortgage for any reason have never had a guarantee of getting a new mortgage within seven years. The ability to get a mortgage is not a right people can count on in general, and the financial industry could collectively decide to permanently blacklist everyone who defaults on any type of loan from getting another loan again. Of course they won't actually do that because they can make money on loans to those people, but they are under no obligation to do so.
posted by burnmp3s at 11:19 AM on July 1, 2010 [3 favorites]

I don't see why anyone should be surprised or upset about this. People absolutely have the right to strategically default, but lenders have zero obligation to give you another loan.

There seems to be some really ugly populism here that people think mortgage lenders should somehow be required to give you a loan. This is like the difference between "free speech" and "speech free of consequences". Everyone should be able to exercise their option to walk away from a mortgage, but it's short-sighted to think that you'll just be able to show up to a lender and get another loan without any problems.
posted by 0xFCAF at 11:30 AM on July 1, 2010 [3 favorites]

Refusing to re-loan for X years isn't the evil part. The "Fannie Mae will also take legal action to recoup the outstanding mortgage debt" part is the evil part.
posted by edheil at 11:36 AM on July 1, 2010 [4 favorites]

Why is it evil to exercise a legal right (mortgage default recourse in a recourse state) on the mortgage holders side but not evil for a borrower to exercise their legal right (foreclosure)?
posted by saeculorum at 11:41 AM on July 1, 2010 [3 favorites]

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.

I think this actually does an excellent job of making it clear to people that it is legal to walk away. After all, if there were laws against it, or you could not do it contractually, that would be sufficient. Instead, they toss in a take-my-ball-and-go-home-for-seven-years clause that highlights their own relative powerlessness, and make it clear that they may pursue it in court -- but it would be as a civil suit, yes?

So, uh, good job. Or something.
posted by davejay at 11:43 AM on July 1, 2010 [2 favorites]

It always amuses me when companies like Fannie Mae try to argue that the lender is responsible for "good faith", but then fail themselves to actually supply any good faith toward the lenders on most occasions.

What this really smacks of is a big money-losing corporation is trying to keep itself from being saddled with a whole slew of foreclosed houses because it fears that outcome. So it saddles the individual loanees with the burden of making sure that the houses aren't foreclosed upon, rather than moving forward itself with solutions.
posted by hippybear at 11:46 AM on July 1, 2010 [1 favorite]

policy changes designed to encourage borrowers to "work with their servicers and pursue alternatives to foreclosure"

I've tried on my girlfriend's behalf, but they don't seem to want to work with us.

In fact, they've asked for every piece of financial information possible. It almost seems like their goal is to bleed her dry before kicking her to the curb...hmmm.
posted by Tavern at 11:48 AM on July 1, 2010

Surely this is the Change I Can Believe In, right?

I warned you people not to trust a slogan with a dangling preposition.
posted by paisley henosis at 12:01 PM on July 1, 2010 [1 favorite]

Will the deficiency suits really make any money? At most, lenders get the difference between the foreclosure sale price and the amount outstanding on the mortgage. From that, subtract the costs of litigating each case individually in a variety of state courts, professional fees, costs of enforcing the judgment, and the years of waiting for all the above to happen. Is it worth it? After all, in the end you might not be able to touch the defandants' assets at all. These people aren't defaulting on their mortgages because they're rolling in dough.

So I question whether this is an economically rational decision. And then you add the PR angle, that the government wants to sue the crap out of people who have lost their jobs and their houses during a time when a ton of people have lost everything in a shitty economy, and it just seems dumb.

As for whether strategic default or deficiency seeking is "evil", I think that word is needlessly harsh applied to either side. But there's a world of difference between a person who loses his job and walks away from a mortgage so that he can feed his kids and the company that sues the crap out of the guy and bankrupts him, all for an expected net return of $5,000.
posted by factory123 at 12:02 PM on July 1, 2010

Refusing to re-loan for X years isn't the evil part. The "Fannie Mae will also take legal action to recoup the outstanding mortgage debt" part is the evil part.

All that is saying is that if the loan is a recourse loan (which is not allowed in a lot of areas) they will exercise their legal right to get a judgment for the amount they are owed after foreclosure.

The idea of strategic default is to let the bank take that loss, but if the borrower who defaults is legally required to pay it they can hardly be shocked that they end up being sued. The main reason it hardly ever happens even for recourse loans where the lender has the right to sue is that it costs the lender money to hire lawyers and whatnot, and suing someone who is already broke doesn't usually end up resulting in a big payoff. But in the case of someone who is strategically defaulting, they have enough money to have continued paying off the loan, so it makes more sense to go after those assets.

The question of whether or not recourse loans are fair in general is debatable (hence the fact that they aren't legal in a lot of places) but Fannie Mae isn't announcing anything here that they couldn't have done yesterday. The whole point of the press release is to scare people into continuing to pay their mortgages if they aren't broke yet by pointing out the consequences of defaulting on purpose.
posted by burnmp3s at 12:02 PM on July 1, 2010 [2 favorites]

...And the whole point of that is to keep from having to pump more taxpayer money into these Government Sponsored Entities in order to cover the calculated losses of people who can actually still afford to pay their loans but make a conscious decision not to so they can get a bad asset off their books.
posted by saulgoodman at 12:09 PM on July 1, 2010 [3 favorites]

Seriously, though, this is nothing more than putting yet another weight on the side of Big Banks and inflated housing prices in the name of evening the scales, pretending with a straight face that the loan recipient has ever been the one in a position of power.

The fact of the matter is that it doesn't matter how small the weight is, or how minuscule of an increment has been added; all that means is 'it could be worse.' The fact that the Federal Government is directly siding against the people is terrible, even if it isn't surprising.

The real question here is: first and foremost is the job of the government to protect the people of the nation or to protect the profits of the businesses of the nation?
posted by paisley henosis at 12:12 PM on July 1, 2010 [2 favorites]

I don't see why anyone should be surprised or upset about this. People absolutely have the right to strategically default, but lenders have zero obligation to give you another loan.

I'm about as libertarian as they come, and normally I'd agree with you 100% here. If someone stopped paying me for a service or debt, not only would I exercise a claim on any collateral, but I certainly would have reservations about signing another contract with that person.

Having said that, Fannie Mae isn't just another lender; they're a quasi-governmental agency that exerts massive influence over the mortgage market as a whole and over other lenders (private and public). If the taxpayers didn't own Fannie, I'd hope that the FTC would be looking at them as a monopolist. And any policy that Fannie sets at this point has to be viewed as a kind of legal action, since they are now under the purview of the executive and legislative branches and therefore the political-financial class.

Shorter version: walk away from a mortgage if you like, don't expect to be given another one, but get the government out of the mortgage industry.
posted by bbuda at 12:14 PM on July 1, 2010 [3 favorites]

Also: the tea baggers couldn't ask for better news in the lead-up to mid-term elections. They'll say that this is a perfect example of the government trampling on them and fucking them over, and they'll be exactly right, and we'll all be worse off for every asshole they get elected.
posted by paisley henosis at 12:14 PM on July 1, 2010 [1 favorite]

all that means is 'it could be worse.' The fact that the Federal Government is directly siding against the people is terrible, even if it isn't surprising.

This is absolutely not true! The people are the ones ultimately stuck footing the bill for all these speculators dropping their mortgages because they can afford to!
posted by saulgoodman at 12:18 PM on July 1, 2010 [1 favorite]

It's no wonder we're in the mess we are. The government thinks it's going to prop up the housing market by refusing to give mortgages to the people in the best shape to pay the money back.
posted by digsrus at 12:19 PM on July 1, 2010

saulgoodman: This is absolutely not true! The people are the ones ultimately stuck footing the bill for all these speculators dropping their mortgages because they can afford to!

But if the Fed would let the housing prices fall to realistic, non- or even just less-inflated levels, the people would be able to buy a house and not pay taxes and mortgage on an extra 15% to 65% of "value" that doesn't exist.
posted by paisley henosis at 12:22 PM on July 1, 2010 [1 favorite]

Shorter version: walk away from a mortgage if you like, don't expect to be given another one, but get the government out of the mortgage industry.

The government was out of the mortgage industry once already. Before Fannie Mae was created.

What happened?

A severe housing crunch that forced the legislative creation of Fannie Mae during the New Deal era to expand housing opportunity.

What makes so many of the geniuses commenting on these issues think that literally rolling back the clock to the depression era (putting us back on the gold standard, eliminating the GSEs, rolling back other new deal regulations, etc.) is the magic ticket to getting our economy back on track?

Never mind. That's a rhetorical question. I don't even want an answer to that.
posted by saulgoodman at 12:22 PM on July 1, 2010 [2 favorites]

But if the Fed would let the housing prices fall to realistic, non- or even just less-inflated levels, the people would be able to buy a house and not pay taxes and mortgage on an extra 15% to 65% of "value" that doesn't exist.

The problem started with crooked lenders and loan originators deliberately gaming the system. My wife was a real estate closing agent here in Florida (one of the three states, along with California and Nevada, that saw the first of the waves of foreclosures that triggered the price collapse, just as in the pre-Depression real estate colllapse), and she's given me all the insight I need into the kinds of real estate speculation and outright fraud that were being carried out routinely in these largely unregulated state markets to understand what really caused this crisis: unconstrained capitalism, pure and simple: economic opportunism undertaken with no regard for broader social consequences--exactly the kind of amoral economic gamesmanship early free marketeers like Smith cautioned were not compatible with the healthy continued functioning of free markets.

In the event that the letter of some system of regulations fails to completely guard against violations of the spirit or principle intent of the regulations, the morally responsibility party is the individual who deliberately violates the principle of the regulation, in my view, and the parties most responsible for the housing collapse were the savvy operators who gamed the system, not the regulators, because they knew full well they were exploiting the system for their own benefit in issuing loans they had no expectation of recovering in order to collect large fees before foisting their liabilities back onto the taxpayers through the well-known implied guarantees enjoyed by the GSEs. The real tragedy is that there likely won't be any great push to prosecute the opportunists who knowingly exploited the system and effectively defrauded us all.
posted by saulgoodman at 12:36 PM on July 1, 2010 [6 favorites]

It's also worth pointing out that the US government is now the single largest provider of money to buy houses, has a powerful interest in keeping house prices up, and is the source of all dollars. If that conflict of interest doesn't terrify you, it should.

Only if you assume that the goal of the government is profits. In fact, the goal is votes for the party that makes the rule changes. That can come in the form of better policy (people see things go well, vote for the party again) or it can come in the form of campaign contributions from incumbent vested interest, which are used to fund campaigns.

But it should be obvious that the government doesn't care about running a profit here. At least not for itself.

Also: the tea baggers couldn't ask for better news in the lead-up to mid-term elections. They'll say that this is a perfect example of the government trampling on them and fucking them over, and they'll be exactly right, and we'll all be worse off for every asshole they get elected.

Except the Teabaggers all think that walking away is somehow immoral or something.
posted by delmoi at 12:48 PM on July 1, 2010

Just another example that we've exchanged "right and wrong" for "size and power".

First, the banks qualify the shit out of you for the loan. Then they collude to govern rates. Then the issue you a SECURED loan. Then they front-load the fuck outta the interest. Then they take their up-front fees, sell the loan to another bank, and walk.

And the borrower is the bad guy.
posted by Benny Andajetz at 12:57 PM on July 1, 2010 [1 favorite]

saulgoodman: In the event that the letter of some system of regulations fails to completely guard against violations of the spirit or principle intent of the regulations, the morally responsibility party is the individual who deliberately violates the principle of the regulation, in my view, and the parties most responsible for the housing collapse were the savvy operators who gamed the system, not the regulators, because they knew full well they were exploiting the system for their own benefit in issuing loans they had no expectation of recovering in order to collect large fees before foisting their liabilities back onto the taxpayers through the well-known implied guarantees enjoyed by the GSEs. The real tragedy is that there likely won't be any great push to prosecute the opportunists who knowingly exploited the system and effectively defrauded us all.

I think that there is blame enough for the incompetent regulators and the greedy scammers, but I think we're on the same page on that.

The thing is, as many cretins as there were out there deliberately acting in bad faith to screw the system over for their own personal gain, there were that many lenders willing to help them for their own cut and a further lazy or corrupt regulator looking the other way on the deal. But there were also people who were talked into a mortgage with no real understanding of finance and people who bought homes that they could afford but only got a fraction of what they paid because the cretins and their cohorts at the bank hiked up the prices; those people were doing their best to act as good actors in the system, and wound up in a terrible situation on no real fault of their own.

If you suggest that we try to separate the bad-actor loan recipients from the good-actor loan recipients and punish those who were hurting the system, I can't disagree with that at all, but the actual separation is going to be very hard indeed. But if it is feasible to punish those people or even if it isn't, letting their cohort lenders and regulators off the hook is a huge mistake.
posted by paisley henosis at 1:05 PM on July 1, 2010

And the borrower is the bad guy.

Well, in a lot of cases, they actually were the bad guys here in Florida. We had (and still have) lenders and borrowers colluding to commit mortgage fraud.

Here are a couple of articles describing how these kinds of fraud were commonly carried out.

In one common scam, the sellers, buyers, appraisers and lenders would all collude to secure an undocumented loan for more than a property's actual worth, then they would split the revenues, before letting the property go into foreclosure.

And those were just the blatantly illegal scams; there were subtler (and nominally, legal) games being played as well.

Not coincidentally, the states with the highest rates of these kinds of scams (and the most lax regulatory environments) were the ones that led the way when the housing collapse began.
posted by saulgoodman at 1:32 PM on July 1, 2010

Then they front-load the fuck outta the interest.

That's how a fixed rate loan is always going to work. On day one you owe x, and need to pay intrest on that x. Over time you pay down y principle as well as the intrest, so you owe x-y and are are paying less intrest. Because your payment is fixed, you are paying more and more principle over time and reducing your intrest soon and sooner. Blaming that on the banks is silly.

If you don't like that you are always able to pay more on a monthly basis. It does mean you will be paying more per month, and that you will be paying off the loan sooner, but that's always an option.
posted by aspo at 1:37 PM on July 1, 2010 [3 favorites]

(and I know that it's spelled interest, but obviously my fingers don't)
posted by aspo at 2:14 PM on July 1, 2010

If you don't like that you are always able to pay more on a monthly basis. It does mean you will be paying more per month, and that you will be paying off the loan sooner, but that's always an option.

I understand that; I was just venting. My wife was in mortgage underwriting for many years, and banks base their fees, etc., on a five-year return - they assume the loan will last more or less 5 years. That's one reason there are umpteen-million up-front charges involved.

The real problem I was trying to get to is that somehow we, as a nation, have reached a point where it has become more important that business (in this case, the banks) does well than that the country does well. How many times do we have to get punched in the nose to realize that business cares about business, and fuck everybody else?

I know it's classy in some circles to call people who question the system like this SOCIALISTS, but, really, who is the good citizen and who is the bad citizen here? I think it's pretty obvious.
posted by Benny Andajetz at 3:26 PM on July 1, 2010 [1 favorite]

Economy 2.0, the post-crash horror story, starring you as the villein of the piece.
posted by Malor at 3:27 PM on July 1, 2010

The business of America is giving Americans the business.
posted by jamjam at 3:58 PM on July 1, 2010 [1 favorite]

Home ownership rates are only 20% higher than during the depression (66% vs 47%).

All the intervention by the federal government has only increased home ownership by 10% since the end of WWII. Let's not overestimate the efficacy of Fannie/Freddie.
posted by r_nebblesworthII at 4:54 PM on July 1, 2010

Even better: Fannie & Freddie were born in late 1960s - home ownership is only up 5% since then (according to the U.S. Census above).

On the other hand, what they have done right is provide a convenient receptacle for gov't's buddies in the finance/housing industry to offload shitty, toxic assets and socialize the losses of idiots and fraudsters.
posted by r_nebblesworthII at 4:59 PM on July 1, 2010

Home ownership rates are only 20% higher than during the depression (66% vs 47%).

Actually an increase of 19 percentage points corresponds to a 40% increase in home ownership, which is not insignificant.
posted by JackFlash at 5:54 PM on July 1, 2010

Look buddy they weren't any math courses in my degree in Internet Crankology
posted by r_nebblesworthII at 7:57 PM on July 1, 2010 [4 favorites]

I can't believe so many of you people have an issue with the statement "We lent X money to buy a house. X decided that since he made a bad decision he was going to stop making payments to us - even though we weren't the people who sold him the house - we just told him he could afford it given his assets and income. We tried to allow X to restructure his loan but he was not interested even though we could have made it work for him. So we aren't going to lend him any money for 7 years. And we might try to get back some of the other money his illegal and bad faith decision cost us"

How is that remotely fucked up? I am utterly and totally at a loss.
posted by JPD at 4:05 AM on July 2, 2010

How is that remotely fucked up? I am utterly and totally at a loss.

Other than the fact that a mortgage is a secured loan, nothing.

The deal is this: The bank assesses the value of the property and qualifies the buyer to determine that there is value in the deal. Then both sides agree to contract that gives the borrower money that is secured by the property. If payments aren't made, the property reverts to the lender. Fair, equitable, and up front.

Walking from the deal -giving up past payments and rights to the property- is a perfectly legitimate business decision on the borrower's part. Large businesses do it all the time. For the lender to turn it into some moral failure on the borrower's part is sleazy, at best.

To accept the lenders' argument is to allow them to conflate business and morality. Everybody knows they only do that when it's convenient for them.
posted by Benny Andajetz at 5:46 AM on July 2, 2010

even better: Fannie & Freddie were born in late 1960s

Fannie Mae was established by an act of congress in 1938. Only Freddie came on the scene in the 60s.
posted by saulgoodman at 6:45 AM on July 2, 2010

We tried to allow X to restructure his loan but he was not interested even though we could have made it work for him.

My actual experience in attempting to restructure a loan does not compute with your magical world.
posted by Tavern at 6:45 AM on July 2, 2010

tell us about your experience then? Was there a loan mod that made it so you could stay in your home? I am sure the paperwork is a nightmare and I am sure it takes forever but the potential for fraud is tremendous. But all they are saying is if we could give you a modification and you didn't act in good faith that is the same as a strategic default - not we will give everyone a mod.


I agree conflating rational economic decisions with some whacked out morality is fucked up - but there should be repercussions if you don't deliver on your contract. Also the secured nature of a home loan is why it is so cheap to begin with. I get what you are saying about it being a secured loan (and in most states with non-recourse that is exactly what it is) but you knew the deal when you signed the mortagage (or should have known)
posted by JPD at 6:55 AM on July 2, 2010

Fannie Mae was established by an act of congress in 1938. Only Freddie came on the scene in the 60s.

Fannie Mae was created in 1938 as a government program. In 1968 it was converted to a private corporation with shareholders, a shareholder-elected board of directors and traded on the stock exchange. Freddie Mac was created in 1970 as a similar private corporation with shareholders. Both Freddie and Fannie were controlled by private CEOs who made the operational decisions and were responsible to the shareholders, not the government. These CEOs made salaries and bonuses of millions of dollars per year. In 2008, the government took over control of Fannie and Freddie when they went bankrupt.
posted by JackFlash at 8:24 AM on July 2, 2010

Man I can't get anything right
posted by r_nebblesworthII at 3:52 PM on July 2, 2010