Fannie Mae Cracking Down on Strategic Defaults

In an effort to help curb homeowners who are upside down on their mortgages from moving to take a strategic default, Fannie Mae is enacting tougher guidelines to make such a move more costly and painful.

Wednesday's announcement by the government-controlled mortgage giant said it would instruct the companies servicing its loans to recommend when it should pursue a so-called deficiency judgment - a court order requiring a defaulting borrower to pay any remaining unpaid portion of the loan after a seized home is sold. In addition, it will make new mortgages harder to obtain for borrowers proven to have opted for a "strategic default" by refusing to buy or guarantee another home loan for them for seven years after their action.

Such a move by Fannie Mae is significant because home buyers have little choice these days for financing except for mortgages bought or backed by Fannie, its sister company Freddie Mac or the Federal Housing Administration, all of which accounted for 95% of new home loans last year. Freddie Mac already blacklists strategic defaulters for five years and HUD bans defaulting borrowers (for any reason) from getting another FHA loan for three years. Both of these mortgage entities also have tougher guidelines currently under consideration including legislation pending in Congress that would impose a lifetime ban on FHA loans to borrowers determined to have made a strategic default.

While these types of policies are designed to help push borrowers into pursuing alternatives other than foreclosure, it's about time that they are held to account. Letting them continue to walk away with little consequence was not an acceptable scenario.