Following up on an earlier post, Fannie Mae Cracking Down On Strategic Defaulters
Moody’s says Fannie Mae’s latest step may increase awareness of the strategic default issue and deter some borrowers who might be contemplating such a move, but there are definite hurdles to implementing such a policy. Hat Tip DSNews.com
In the case of enforcing the seven year waiting period before someone who strategically defaults can receive another Fannie Mae mortgage, Moody’s sites the following as potential challenges for Fannie Mae.
- There is no consensus on the precise definition of strategic default
- It may prove to be difficult to determine whether a borrower chose to renege on their mortgage obligation or acted in anticipation of a potential job loss or other loss of income.
- The majority of cases are likely to require costly review, and could be contested by borrowers in court.
- Such reviews would have to be conducted retrospectively, several years after an initial foreclosure, when the borrower applied for a new loan.
Additionally, if defaulters are able to obtain loans from other sources such as Freddie Mac, the Federal Housing Administration (FHA) or other lenders, before the seven year waiting period imposed by Fannie Mae, the policy will not be effective in deterring homeowners from strategically defaulting. In short, without universal adoption by the mortgage industry as a whole, the Fannie Mae policy will not be effective in reducing strategic defaults.
However, Moody’s does say that Fannie Mae’s policy of pursuing deficiency judgments against strategic defaulters will be a more effective at discouraging walk-aways than a lengthy waiting period before getting a new mortgage. And I would have to agree. The threat of a large judgment and the long term financial impact it would have is a much stronger deterrent then a seven year waiting period for a new mortgage.