Should Fannie Be Punishing Homeowners Who Walk Away?

The mortgage giant vows to go after "strategic" defaulters

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Fannie Mae is putting its foot down. The mortgage giant, which is 80 percent owned by the U.S. government, says it will deny new loans to borrowers who "strategically" default and walk walk away from their homes. “Walking away from a mortgage is bad for borrowers and bad for communities,” said Terrence Edwards, an executive vice president at Fannie Mae. “Our approach is meant to deter the disturbing trend toward strategic defaulting.”

The firm will take borrowers who use this tactic to court and ban them from getting new mortgages backed by Fannie for seven years. The decision to "strategic default" has become increasingly popular for borrowers who owe more than their homes are worth. The question is: should Fannie be going after these people?

  • Shame On You, Fannie, writes Felix Salmon at Reuters: "This is an important and 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... This is going to do significant harm, and it’s going to do no substantial good at all."
  • Shame? This Is a Needed Policy, writes Dan Indiviglio at The Atlantic: "It's probably ultimate good that Fannie plans to go after strategic defaulters for outstanding debt. First, this obviously benefits taxpayers. Anyone who rents or responsibly pays their mortgage on-time each month shouldn't be subsidizing people from walking away from a home that they can pay for if they choose. Second, as mentioned here yesterday, the housing market is better off with fewer strategic defaults. If all underwater homeowners just handed in their keys, housing prices would decline endlessly."

  • I Doubt They Can Pursue Victims, writes Annie Lowrey at The Washington Independent: "My question remains: How does Fannie know who is a 'strategic' defaulter, and who is a plain-old defaulter? Most 'strategic' defaulters, I have found, would be plain-old defaulters within a matter of weeks or months — particularly given that 80 percent of subprime borrowers who default do so only because of income loss."
  • This Tells Us Something About Home Buyers, writes the financial blog Calculated Risk: "This reminds us of one of the tragedies of the bubble: many people bought before they were ready, or bought too much home. Whether they are 'walking away' or losing their home because they can't afford it, they will be out of the market for some time."
This article is from the archive of our partner The Wire.