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Fannie Mae takes action against strategic defaults

A Wells Fargo Home Mortgage branch in Brooklyn, N.Y.

TEXT OF INTERVIEW

Bill Radke: The giant government-owned mortgage company Fannie Mae is taking action to prevent homeowners from walking away from their mortgages when they could afford to make the payments. Homeowners use these strategic defaults because their home is worth less than they owe the bank. Fannie Mae has a plan to discourage the praice. Here live with us to explain is Marketplace's Mitchell Hartman. Good morning, Mitchell.

Mitchell Hartman: Hi, Bill.

Radke: How does Fannie Mae plan to crack down on "strategic defaults"?

Hartman: Well they'll begin "locking out" these borrowers from getting new mortgages for seven years. They'll also go after strategic defaulters for the money they owe in states where that's allowed. A top executive is quoted by the Wall Street Journal as saying "Walking away from a mortgage is bad for borrowers and bad for communities." And of course it is from the lender's perspective, because it leaves them holding the bag -- they've got a foreclosed house they have to sell probably at a loss and it makes all mortgages more risky.

Radke: Well how big a problem is this?

Hartman: Well, it used to be pretty rare. Mortgages were pretty much sacrosanct. Even when they got in financial trouble, they tried to keep paying their mortgage so they wouldn't foreclosed and lose any equity. But nowadays, a lot of people don't have any equity. One in four homeowners now owe more on their house than they can sell it for. Some of them can afford to keep paying, they just don't want to anymore. A recent report by Morgan Stanley found that about 12 percent of foreclosures are "strategic" at this point, and the trend's likely to increase since home prices are still going down.

Radke: You know Mitchell, it's a controversial thing, but there's a reason they call these defaults "strategic" -- you can see the logic. Why keep throwing good money after a bad mortgage?

Hartman: Well you know that's true, and there are academics actually who are arguing that this is sort of perfectly economically rational. Of course as long as you can handle this penalty of a seven-year lockout at this point. And some big real estate developers clearly think it's also fine, since we've been seeing them walk away from billion-dollar mortgages that they don't want to pay out anymore.

Radke: Yes. Marketplace's Mitchell Hartman. Thank you.

Hartman: You're welcome.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.

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