When Fannie Mae got taken over by the US government, it became even more of an instrument of state policy than it was before. Today, Fannie Mae and its state-owned brethren (foremost among them Freddie Mac and the FHA) are responsible for funding the overwhelming majority of mortgages in the US: they essentially are the housing market, for most of us. So when it comes to the problems of default and foreclosure, it’s crucial that Fannie Mae be part of the solution rather than part of the problem. Instead, it’s decided to get onto a self-defeating moralistic high horse.
The headline of Fannie’s latest press release says it all. “Fannie Mae Increases Penalties for Borrowers Who Walk Away”:
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…
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.
This is going to do significant harm, and it’s going to do no substantial good at all. Mike Konczal has an excellent response, as you’d expect: the key thing to note is that Fannie is not proposing the kind of modifications that minimize the probability of redefault — ie modifications which reduce the principal amount outstanding. By encouraging homeowners to modify their loans without reducing the amount they owe or having any chance of having any equity in their homes in the foreseeable future, Fannie is kicking the can not very far down the road, and ensuring that default and foreclosure will be a nationwide problem for years to come.
Meanwhile, when Fannie is presented with innovative ways of keeping homeowners in their homes and saving on substantial foreclosure costs at the same time, it refuses to do so. I make no apologies for the long hyperlink there — this is an important an under-reported story. Rather than do something concrete and positive-sum and helpful, Fannie Mae is happier putting out press releases which talk airily and moralistically about people who walk away from their loans without any visible attempt to define what they mean by that.
Ultimately, of course, this new policy is something of an empty threat in most situations. Is Fannie really going to spend huge amounts of time and money and effort going for deficiency judgments against borrowers who clearly are victims of the housing bust, especially when it’s certain that the money they collect will fail to cover their legal costs? I doubt it. And the refusal to issue a new mortgage to these people for seven years is something of a blessing in disguise, since substantially all of these jingle-mailers will be better off renting anyway.
In fact, it would be quite wonderful if the new Fannie Mae policy created a new class of people who thought that they needed to own their home but who, after renting for seven years, finally work out that it’s a lot less unpleasant than owning, and that maybe they should just continue to do so in perpetuity. It’s not exactly the intent of the Fannie Mae policy, but let’s hope that this misguided idea has some kind of silver lining.
Keep promoting your idea of a rentership society, Felix.
It gives us members of the ownership class a nice underclass to support those of us willing to take over the ‘burden’ of owning! Is being a slumlord kind of like being a feudal lord?
Assuming that everyone facing foreclosure is a victim of the housing bust is pretty offensive to those of us who bought houses we could afford, with simple, easily understood mortgages, who did not cash out the illusory increase from the bubble, and are now expected to pay for the results. Many of your so-called ‘victims’ of the housing crash are instead contributors to the housing bubble.
Were I a free market fundamentalist, I’d say that this was actually a positive development, as it promotes what the marketplace is supposed to do: redirect resources away from participants who don’t use capital wisely (in this case: buying an unaffordable home during a asset price bubble) and toward those who will use capital wisely (people who avoided buying homes during the bubble, when it was obvious to any reasonable person that prices had appreciated substantially over the level called for by the fundamentals).
Mortgage “modifications which reduce the principal amount outstanding” would reward those who took part in the bubble and who essentially bet on wild unsustainable asset prices appreciation, and harm those who deliberately avoided taking out a mortgage on an overpriced asset and conservatively invested their capital, saving up their down payment money, patiently waiting for prices to come down to a reasonable level. There’s just no good economic rationale for doing that.
The first part is silly. There’s no point holding a grudge against people who did what they were entitled to do under the conditions of the loan.
The second part about collecting money where the jurisdiction allows, is what any bank would do. I believe Felix is on the board of a credit union? What position do they take when people owe money they can afford to pay but don’t want to? I might be in the market for a loan!
Felix wrote: “So when it comes to the problems of default and foreclosure, it's crucial that Fannie Mae be part of the solution rather than part of the problem. Instead, it's decided to get onto a self-defeating moralistic high horse.”
Why is the concept of ‘If you don’t pay me, I won’t lend to you again’ moralistic and not just pure capitalism and rational economics?
Oh, wait, it is capitalism and rational economics; it’s just oblique and further down your discussion:
“And the refusal to issue a new mortgage to these people for seven years is something of a blessing in disguise, since substantially all of these jingle-mailers will be better off renting anyway.”
Look, I don’t like Fannie anymore than the next guy. But creating penalties for violating financial contracts is an economically rational reaction to borrowers who don’t pay. You are now starting to see the ugly side of encouraging ‘jingle mail.’ And expect more.
Read Full Article »
