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Lawmakers Challenge Fannie Mae’s New Policy on Strategic Defaulters

By: Carrie Bay

A faction of House Democrats have called on Treasury Secretary Timothy Geithner and the regulator of Fannie Mae, the Federal Housing Finance Agency (FHFA) to suspend the GSE’s recently announced policy to sue homeowners who strategically default on their mortgage.

In late June, the mortgage giant issued a notice stating that defaulting borrowers who walk away when they had the capacity to pay, or who do not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage for a period of seven years from the day of foreclosure.

In addition, Fannie Mae said it will take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments.

The group of lawmakers, led by Rep. John Conyers, Jr. (D-Michigan), called the policy “opaque, overbroad, and punitive,” and decried Fannie for using taxpayer dollars to penalize underwater homeowners.

Conyers and his colleagues sent a letter to Secretary Geithner this week, urging him and FHFA Acting Director Edward DeMarco to suspend the policy indefinitely until the administration and Congress have reviewed the implications and determined if it is in the best interest of the American people to have Fannie Mae pursue such a strategy.

“This policy is one of many which seems to run counter to the national need to stem the tide of foreclosures which are devastating communities across our nation,” the correspondence stated. “At a time of record deficits and a nation crying for the government to get its finances in order, it is also unclear why Fannie Mae is proposing to use taxpayer dollars to pursue legal judgments against individuals who will lose or have lost their homes, have wrecked their credit rating, and likely have little or no remaining monetary assets.”

The lawmakers went on to say, “Treasury has already invested $86 billion into Fannie Mae and considering Fannie Mae’s dependence on federal dollars to exist and operate, we think pursuing expensive litigation against a vulnerable population when there appears to be little to no economic incentive is questionable at best.”

The legislators also questioned what objective criteria Fannie would use to determine whether a default was truly strategic. The GSE has said it will rely on the reports of its servicers to determine borrower intent.

“We have great concern with putting such faith in the servicers,” the lawmakers wrote, citing feedback from their constituents and a number of congressional watchdog groups that call into question servicers’ performance in dealing with huge volumes of defaults and communicating effectively with borrowers.

In addition to Conyers, the letter was signed by Reps. Marcy Kaptur (D-Ohio), Raúl Grijalva (D-Arizona), Steve Cohen (D-Tennessee), Barbara Lee (D-California), Zoe Lofgren (D-California), and Michael Honda (D-California).

Fannie Mae says its policy is designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure by imposing stiffer penalties for strategic defaulters.

According to the analysts at Moody’s Investors Service, the new rules will be difficult to implement and even harder to enforce. In fact, they warn that Fannie’s policy could potentially reignite private subprime lending.