June 24, 2010
That is the question that reporters should have asked when Fannie Mae announced a new policy of going after deficiency judgments against homeowners who strategically default on mortgages. Usually banks do not pursue deficiency judgments because whatever they are able to collect will not cover the expenses involved. Fannie Mae is apparently planning to pursue these legal actions even when it will lose it money.
Since Fannie Mae is already receiving over a hundred billion dollars from the government to cover its losses, this means that it will require even more taxpayer dollars than would otherwise need in order to engage in this punitive activity against defaulting homeowners. It also announced that it would increase the period in which it excludes a defaulting homeowner from qualifying for another mortgage from 5 to 7 years, if it determines that they had strategically defaulted.
This decision also appears to be based on a desire to punish defaulters, not profit maximization. This would mean that Fannie would be turning down the opportunity to buy otherwise profitable mortgages, further increasing its losses. As the Washington Post would say in other contexts (e.g. discussions of extending unemployment benefits), Fannie’s actions will add to government deficits that are already at record levels.
It is also worth reminding readers that the losses at Fannie and Freddie were effectively subsidies to banks. They paid banks more for mortgages than they were worth.
[Addendum: Just to emphasize a point in the original note, banks typically do not pursue deficiency judgments because they don’t believe that they will collect enough money to cover the costs. The suggestion in this article is that Fannie Mae intends to depart from the normal practice, not because they think they will recover more money, but rather to punish people who strategically default. This means that Fannie will be costing taxpayers more money, not less, because Fannie’s executives (who get paid $6 million a year) decided it was important to punish strategic defaulters.]
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