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Home Publications Blogs Beat the Press How Many Taxpayer Dollars Will Fannie Mae Spend Punishing Homeowners?

How Many Taxpayer Dollars Will Fannie Mae Spend Punishing Homeowners?

Thursday, 24 June 2010 05:00

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.]

Comments (14)Add Comment
written by Moopheus, June 24, 2010 7:36
So you're saying that if someone "strategically defaults" we should just let them go? I mean, now the taxpayers effectively own those loans. I don't believe that either party to a contract has more "moral obligation" than to do anything other than what's in the contract, but if they think they can recover losses, they should do it. Otherwise it comes out of our pocket either way.
Loss minimization requires consequences for deadbeats.
written by AndrewDover, June 24, 2010 7:46
Pure baloney. The state loses money on every thief who is sent to jail, but it still makes sense to deter theft.

Most people pay their mortgages. Most people who don't pay their mortgages, can't pay.

If 12% all mortgage defaults are "strategic" or deadbeat defaults (Morgan Stanley estimate), then there is no reason to let the worst half of those stiff the Government without any consequences at all.
written by izzatzo, June 24, 2010 8:16
This decision also appears to be based on a desire to punish defaulters, not profit maximization.

Upon recognition by corporations that persons now have the legal right to strategically conduct themselves in the same manner of corporations in all manner of economic activity including but not limited to default, bankruptcy, fraud, corruption, government nannyship of massive subsidies and even offshoring one's telecommuting labor and workplace with a fake address in the Cayman Islands ...

... these persons will be punished with banishment from all financial activity other than payday loan shark outlets, for engaging in abusive moral hazard overconsumption, and for daring to believe they were awarded the legal rights of corporations and proceed to act out on these rights on a level playing field, where all costs of punishment shall be borne by them as well as the thieving taxpayers they are.
Further comment on article
written by Tim, June 24, 2010 8:33
"Fannie's move comes amid greater concern that it has become socially acceptable for borrowers to stop paying their loans, and that such a shift could exacerbate the housing bust." . . . So, I guess the concern is that people will start to act in their own economic interest. Isn't think what we're told is the essence of capitalism? How can it be such a bad thing, then?
written by MarkJ, June 24, 2010 8:52
True to their Nanny State pedigree, out of control financial institutions have dumped their toxic mortgage junk on Fannie Mae and now expect the taxpayer to fund the cleanup of their financial mess ad infinitum.
Only talking about the dishonest fringe here
written by AndrewDover, June 24, 2010 8:57
Yes Izz, some mortgages are non-recourse.
Yes Tim, people will act in their own economic interest.

But that does not mean that anyone who defaults has a right to get another mortgage.

And if the mortgage allows it, there is no reason why a bank account, a yacht or a expensive car should be immune from the normal legal collection process.

Remember, we are talking about people who have the assets or income to pay their debt, but refuse. IE we are only talking about a very small dishonest group. We are not talking about the guy who fell sick, or whose factory closed. We are mostly talking about real estate speculators who are trying to socialize the losses after collecting private gains during the real estate bubble.

Notice "Fannie is preparing to reduce waiting periods for borrowers facing hardship who surrender their homes and avoid foreclosure."

Dean is defending the wrong group.
written by skeptonomist, June 24, 2010 9:41
Banks were not the only people who were gambling with government backing, there were also house flippers. A bad credit rating and a 7 year ban(if they even get that) is no suitable punishment for people who buy houses they have no intention of using and then walk away when the price drops. Of course the banks colluded with flippers by offering trick mortgages with low or no down payment, and the Fed encouraged the practice. Credit default swaps also played a role, and there is no reason to think that pending legislation will change them significantly. As far as I can see the exent of gambling on houses is not really known, and little has been done specifically to discourage the practice.

A desire to punish people who gamble at taxpayer expense is not a bad thing if it prevents gambling in the future.
Tax breaks Americans savor are costing Uncle Sam big
written by T Jones, June 24, 2010 10:45
Taxpayers vs. tax deductors in the same article would be reality check.

How about the tens of millions of other Americans who benefit from tax policies that reduce the cost of buying a home. Most affluent enough to buy a home without help, but happy to use a tax deduction for mortgage interest, even though it will cost the federal treasury about $103 billion in lost revenue this year.
written by liberal, June 24, 2010 11:25
"How about the tens of millions of other Americans who benefit from tax policies that reduce the cost of buying a home."

It doesn't necessarily reduce the cost of buying a home.

A big fraction of the cost of buying a home is the land underneath it. Where I live (suburb of DC), it's clearly more than half, probably 2/3.

Because the supply of land is fixed, tax breaks do nothing more than increase the price of land, because the price of land is the net present value of land rent after taxes.

So much of the tax break is already gone---it went to people who owned land at the time the break was introduced.

NB: I myself think land should be taxed extremely heavily.
written by liberal, June 24, 2010 11:27
I don't mind the idea that strategic defaulters are punished, since we avoid moral hazard that way.

But let's not forget that, in terms of money spent, the big crime isn't a relatively small number of strategic defaults, but rather hte fact that the GSEs are being used as a backdoor TARP to funnel what's probably hundreds of billions of dollars to banks and other institutions, by taking crappy loans off their books.
written by Drew Kime, June 24, 2010 5:46
AndrewDover said, "IE we are only talking about a very small dishonest group."

Then it should be even better to go after the very smallest, most dishonest group. By strange coincidence, this is the same group that has profited the most on a percentage and absolute basis.

Have I made it too obvious I'm talking about the banks?
The logic in the Addendum does not take into account the full effects
written by AndrewDover, June 26, 2010 5:36

Dean's logic is:
If Fannie Mae pursues a strategic defaulter, it will cost more than the likely recovery. Therefore it will cost taxpayers more money.

But more people would default if there were no consequences. So the minor possible loss to pursue one defaulter will be recovered by preventing a larger number from causing a major loss to the taxpayers.

"... our approach is meant to deter the disturbing trend toward strategic defaulting," said Terence Edwards, Fannie's executive vice president for credit portfolio management."
written by Dr W, June 28, 2010 2:52
Not all states are 'deficiency judgement' states and for those that are NOT -- the law cannot be amended after the fact. We were always amused, when considering whether or not to buy in a new state, to find that bank employees had NO IDEA what we were talking about when we ASKED.

Just as we were both ASTONISHED and AMUSED when transferring IRA accounts from one institution to another to have simple-minded bank employees INSIST that if we were sitting together at a bank desk we must be MARRIED (how quaint!) and furthermore, not comprehending what INDIVIDUAL retirement account means! (No, the other person sitting there did NOT have to sign the papers!)
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.