Fannie Mae Gets Tough On So Called "Strategic Defaulting"

A couple weeks ago, on the program Sixty Minutes, I watched home owners, who had the means to pay their respective mortgages, refused to do so, invoking what is known as “strategic default.”  This so called “strategic default” is all the rage among many home owners who have abandoned their mortgage obligation.

Strategic default is undertaken where a home owner who has the financial means to meet his or her obligation deliberately foregoes paying the mortgage because when the owner calculated the payments at the old interest rates, it was better financially to abandon the payments because the equity in the home is less than when the owner purchased the home. The owners employing strategic default are not worried about their credit ratings because the savings, in these economic trying times realized are more than an incentive not to do so.


Dow Jones Newswires are reporting that Fannie Mae has changed its posture on mortgage holders. One could deem Fannie Mae’s new approach as a “carrot and stick” approach in dealing with mortgage holders. Fannie Mae had to do something because, in essence, those home owners who were meeting their mortgage obligations were being punished for doing what is right, while those who invoke strategic default benefited by breaching their obligations to pay their mortgages.

Fannie Mae will not allow those who had the means of paying their mortgage but refused to do so to receive a mortgage loans for seven years. Fannie Mae will implement a means test and if it found that an owner legitimately could not meet his or her mortgage obligations, then that owner would be eligible for a mortgage loan in three years. Mortgage defaulting is just another chapter in the protracted dire straits that our economy is in and the irony is that many will tell Fannie Mae contributed to the mess.