Fannie Mae to Profit on the Unfortunate
Taxpayer-owned mortgage giant Fannie Mae is targeting families by going after struggling homeowners who default on their mortgage, the firm announced Wednesday.
Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America's secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers.
Even where the financial responsibility for a mortgage debt in a bankruptcy is discharged, they can still seize, even the primary residence, of the unfortunate debtor.
A default is considered strategic when homeowners have the capacity to pay, yet choose to walk away from their mortgage. The trigger, researchers say, is negative equity: When the value of a home is less than what the lender is owed on it, borrowers are more likely to strategically default.
Many lenders, when informed of a borrower's difficulty of paying their loan, adamently refuse to refinance or modify the mortgage, reflecting the loss of value.
About 11.3 million homeowners with a mortgage, or 24 percent, owe more on their mortgage than the home is worth, according to real estate research firm CoreLogic. Another 2.3 million have less than 5 percent equity in their homes. All told, about 29 percent of all homeowners with a mortgage are upside down on their mortgage. The firm estimates that the typical homeowner won't return to positive equity until late 2015 or early 2016.
Even where the financial responsibility for a mortgage debt in a bankruptcy is discharged, Lenders can still seize, even the primary residence, of the unfortunate debtor.
Shouldn't the Lenders of Mortgages be taking a risk when writing the loan? Why should the Bankers profit by preying on the unfortunate?
In September 2008, Fannie Mae entered into a Senior Preferred Stock Purchase Agreement with the U.S. Department of the Treasury, which was subsequently amended in May 2009 and December 2009. Under the terms of this Agreement, Treasury has committed to providing Fannie Mae with funds, as needed, to correct any net worth deficits. Treasury's remaining funding commitment to correct any net worth deficits will be $124.8 billion
The scheduled unpaid principal balance of single-family MBS loans that were delinquent as to four or more consecutive monthly payments as of April 30, 2010 was approximately $56.8 billion, compared to approximately $94.2 billion as of March 31, 2010.
Fannie Mae, an arm of the federal government and a big part of the Obama administration's housing policy, wants to make sure that if struggling families walk away, they suffer for it.
Homeowners who strategically default or did not work "in good faith" to avert foreclosure through other means will be ineligible for new Fannie Mae-backed mortgages for seven years.
The firm said it will also pursue homeowners in court, seeking so-called "deficiency judgments" to recoup outstanding debt by seizing borrowers' other assets. Thirty-nine states do not limit the ability of lenders to recover what they're owed.
Fannie Mae and its sister firm Freddie Mac guarantee nearly three out of every four new mortgages, according to leading industry publication Inside Mortgage Finance. The two firms control about $5.5 trillion in home mortgages, according to their federal regulator. That's nearly half of all outstanding mortgage debt in the U.S. Their share of the mortgage market is nearly double what it was 20 years ago.
"I can't help but notice that every group now frantically calling for tough penalties for homeowners who walk away was virulently opposed to judicial modification of mortgages in bankruptcy," said Rep. Brad Miller, a North Carolina Democrat.
Bank of America and Citigroup, the nation's largest and third-largest banks by assets, respectively, support changing existing law to give federal judges the power to modify mortgages in bankruptcy, otherwise known as "cramdown." Proponents argue that if homeowners were able to modify their mortgages in bankruptcy, the number of strategic defaults would substantially decrease.
"Lenders are unlikely to pursue a deficiency judgment even in recourse states because it is economically inefficient to do so; there is no tax liability on 'forgiven portions' of home mortgages under current federal tax law in effect until 2012; defaulting on one's mortgage does not mean that one's other credit lines will be revoked; and most people can expect to recover from the negative impact of foreclosure on their credit score within two years (and, meanwhile, two years of poor credit need not seriously impact one's life)," he writes.
While it's still taboo among most homeowners, it's common behavior among corporations.
Fannie was effectively nationalized in September 2008. Taxpayers own 79.9 percent of Fannie and Freddie. The Obama administration announced on Christmas Eve that it would provide unlimited financial assistance to the firms, disregarding what was a $400 billion cap on taxpayer bailouts. Their debt is backed by the U.S. Government.
The two firms, facing growing losses on mortgages in perhaps a worsening housing market, have already taken $145 billion from taxpayers. Fannie Mae is responsible for $83.6 billion of that bailout.
Freddie Mac did not say it would take a similar position on strategic defaulters.
The Congressional Budget Office has predicted that the final bill could reach $389 billion.
Some analysts even estimate the total may reach $1 trillion, which Sean Egan, president of Egan-Jones Ratings, recently told Bloomberg is “a reasonable worst-case scenario."
Fannie Mae said Wednesday that borrowers who have "extenuating circumstances may be eligible for new loan in a shorter timeframe" than the seven-year period it's warning about.
Rep. Darrell Issa, the top Republican on the House Committee on Oversight and Government Reform, attempted Wednesday to amend the financial reform bill under consideration by the House and Senate to mandate that the federal government appoint an inspector general to oversee Fannie and Freddie.
Republicans have also tried to amend the bill to subject Fannie and Freddie to the Freedom of Information Act so members of the public can keep tabs on the firms by compelling the disclosure of documents and records.
Both efforts were thwarted by House Committee on Financial Services, Chairman Barney Frank (D-Mass.), who ruled that they were not "germane" to the legislation under consideration.
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