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Marketplace

Lender tries to prevent strategic defaults

Marketplace Staff Jun 24, 2010
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Kai Ryssdal: The government-owned mortgage lender Fannie Mae has had about enough of people walking away from their homes. “Strategic default” is what that’s called — people packing up and moving out when they don’t think the mortgage is worth paying anymore. Today Fannie said it’s getting tough. Strategic defaulters will be locked out of any new Fannie Mae-backed loans, which is a good chunk of the mortgages in this country, for seven years.

Marketplace’s Jeremy Hobson reports.


Jeremy Hobson: When real estate attorney Cathy West Olivetti heard about the new efforts by Fannie Mae, she was puzzled.

CATHY WEST OLIVETTI: Wait a minute. What’s a strategic default? How do you determine that someone is really able to afford the mortgage or not? You know, what is a hardship?

Fannie Mae says it has clear guidelines to determine what a hardship is. And it’ll be up to mortgage servicers to decide whether homeowners are walking away from loans they have the ability to pay. All Fannie Mae will do is apply the penalty: If you strategically default on your mortgage, no Fannie-backed loan for seven years.

GUY CECALA: Realistically, they control about 25-30 percent of the mortgage market these days. So that’s a real threat.

Guy Cecala is the publisher of Inside Mortgage Finance.

CECALA: On the other side, some people say we’re not sure whether Fannie Mae will be around in seven years.

Even before the new Fannie Mae policy, strategic defaults weren’t risk-free. Borrowers typically take such a hit to their credit scores that they’re unable to get another mortgage for years. And in some states, lenders can go after more than just the house in the case of foreclosure. Still, real estate lawyer Cathy West Olivetti says those punishments might be better than the alternative — borrowers throwing good money after bad.

OLIVETTI: They’re being smart. I look at it as they’re finally being smart about something.

And she says in her South Carolina practice, the number of strategic defaulters is growing by the day.

In New York, I’m Jeremy Hobson for Marketplace.

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