Fannie Mae Announced Sanctions for Struggling Homeowners for Strategic Defaults

Fannie Mae recently announced sanctions against homeowners who strategically default on their mortgage, making them ineligible for Fannie Mae mortgages for seven years. A “strategic default” is defined when a homeowner did not work in good faith to avoid foreclosure and has as the ability to pay but chooses to walk away when the value of the home is less than what is owed.

Fannie Mae also announced that they would seek “deficiency judgments” against homeowners in court to recover debt by seizing borrower’s other assets. Since Arizona is a non-deficiency state, this threat does not hold much clout against Arizona homeowners.

The Wall Street Journal recently reported that nearly one in five mortgage defaults in the first half of 2009 were considered strategic. Fannie Mae’s recent decision attempts to curb homeowners from forcing foreclosure to pursue other alternatives such as a lender-approved short sale or formally giving up the deed.

Analysts question whether the aggressive Fannie Mae sanctions will have a positive effect on the housing market. The plan clearly challenges the Obama administration’s policy of stimulating the fragile housing market.

Furthermore, Fannie Mae’s policy might be impossible to execute. The task of distinguishing between intentional defaults and homeowners who had no other options will subject Fannie Mae to scrutiny. Additionally, Fannie Mae’s pursuit of deficiency judgments is economically inefficient since there is no tax liability on forgiven portions of home mortgages until 2012.

Whether or not Fannie Mae will be able to execute the new policy is to be determined. However, the policy draws one important question: will the housing market improve with decrease of mortgage defaults, especially with a decline in unemployment or do home prices need to appreciate before the market can improve? Time can only tell.