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Is Fannie Mae demonizing mortgage 'victims'?

June 24, 2010 |  9:28 pm

Reuters financial blogger Felix Salmon attacks mortgage titan Fannie Mae for the company’s move this week to boost penalties for people who walk away from their home loans.

“When it comes to the problems of default and foreclosure, it’s crucial that Fannie Mae be part of the solution rather than part of the problem,” Salmon wrote. “Instead, it’s decided to get onto a self-defeating moralistic high horse.”

Fannie Mae announced on Wednesday that borrowers who have the ability to pay their loans, but decide to walk away instead -- most likely because the loan is worth more than the house -- will be blacklisted from getting another Fannie-backed loan for seven years.

What’s more, the company said it would seek to go after walk-away borrowers in court in states where laws allow such pursuit for defaulted home loans.

Fannie, which has been under government control since September 2008, says it wants to push more borrowers to work with their lenders on loan modifications rather than give up. But Salmon argues that the company continues to resist modifications that reduce the principal value of loans enough so that homeowners have an equity incentive to stay in their houses.

He wrote:

By encouraging homeowners to modify their loans without reducing the amount they owe or having any chance of having any equity in their homes in the foreseeable future, Fannie is kicking the can not very far down the road, and ensuring that default and foreclosure will be a nationwide problem for years to come.

Ultimately, of course, this new policy is something of an empty threat in most situations. Is Fannie really going to spend huge amounts of time and money and effort going for deficiency judgments [in courts] against borrowers who clearly are victims of the housing bust, especially when it’s certain that the money they collect will fail to cover their legal costs? I doubt it. And the refusal to issue a new mortgage to these people for seven years is something of a blessing in disguise, since substantially all of these jingle-mailers will be better off renting anyway.

-- Tom Petruno
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