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New 'Strategic Defaulting' Policy Change Avoids the Tough Steps Needed

Fannie Mae’s PR move.

9:45 AM, Jun 26, 2010 • By JIM PREVOR
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If Fannie Mae is serious at all about stopping “strategic defaulting,” it needs to do three things:

1) In each and every case in which a mortgage allows Fannie Mae to pursue a deficiency judgment, it must, as a matter of policy, do so. If Fannie Mae judges the likelihood of recovery to be too low to justify a lawsuit, it must offer its right to pursue a deficiency judgment at auction and see if others think it is worth something. It must do this both because it has an obligation to taxpayers to pursue the maximum recovery possible and to set a clear policy so people will know that they can’t just walk away.

2) Fannie Mae must only initiate or purchase mortgages that specifically give the note-holder the right to pursue a deficiency judgment.

3) Fannie Mae must refuse to initiate or purchase mortgages in jurisdictions that prevent it from pursuing deficiency judgments. In other words, one of the costs for a state that imposes or maintains such laws is that they won’t have Fannie Mae supporting the mortgage market in that state.

This would show seriousness about preventing the kind of “strategic defaults” that plagues the market today, whereas the move to a seven-year recidivism standard is a gimmick.

If the thought is that this is too harsh, these policies could be combined with another: A requirement that mortgage issuers, at the time of origination of the note, offer the mortgagee the opportunity to purchase, at a declared price, a put option on the property. It would be interesting to see how many consumers would actually be willing to part with money to have the right to sell their homes at mortgage value at any time.

In any case, ending “strategic defaults” on federally supported mortgages will save the taxpayer money and lead homeowners to consider more carefully the obligations they undertake. Both outcomes devoutly wished. And both outcomes unlikely to be obtained by a seven-year gimmick.

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