Aunt Fannie and Uncle Freddie May Cause a New Round of Strategic Defaults
Having gotten over moral hazard, Fannie Mae and Freddie Mac may be encouraging borrowers to participate in strategic default. In recently published guidelines, the Federal Housing Finance Agency (FHFA) announced new requirements for the sale of non-performing loans (NPL) by Freddie Mac and Fannie Mae, which make foreclosure a last resort. The FHFA believes that these regulations will result in favorable outcomes for borrowers in default, allowing them to keep their homes. While this may be true, another result of this regulation will be strategic defaulters; homeowners who could potentially afford to pay their mortgage but owe more than what the property is worth. The relevant FHFA requirements include:
This will require the buyers of NPLs to identify their servicing partners at the time of qualification, and require that they demonstrate a record of successful resolution of loans through alternatives to foreclosure.
This will require that the new servicer of the loan evaluate all pre-2009 borrowers for the U.S. Department of the Treasury’s Making Home Affordable Program, and all post-2009 borrowers for a proprietary modification. The proprietary modification must provide a benefit to the borrower with the potential for a sustainable modification.
Loss mitigation waterfall requirement
This will require that the servicer evaluate borrowers for a “waterfall” of resolution tactics, including loan modifications and short sales, before considering foreclosure as a final option.
This will require NPL buyers and servicers to report loan resolution results and borrower outcomes for four years after the NPL sale. The borrower outcome reports will be used to help determine whether an NPL buyer and servicer continue to be eligible for future sales.
The Wall Street Journal reports that these changes come after years of outcry from housing advocates who have complained about investors treating homeowners roughly after buying loans formerly owned by the government. The goal of these requirements is to ensure that the investors and servicers make various attempts to keep borrowers in their homes before considering foreclosure as an option. While these regulations were created to benefit homeowners who cannot afford to pay their mortgages, they will certainly have an appeal to those borrowers who may be able to continue making payments but owe more than their home is worth. With these regulations as an ace in the pockets of homeowners, strategic defaulters will have new support from good ol’ Uncle Freddie and Aunt Fannie.