Fannie and Freddie appear to be reacting to the wave of walkaways: Homeowners who look at their mortgage bills and decide that they're paying too much for homes that have declined greatly in value. Economists call this "Strategic Default," and by some calculations they account for more than one in five foreclosures.
The American Banker reported yesterday that Fannie Mae and Freddie Mac have begun offering loan modifications to borrowers who tried but couldn't qualify for the Home Affordable Modification Program "HAMP" because their housing costs are less than 31 percent of their income.
Why would the Feds do that?
The official line from the government's overseer of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA), is that it's "still in the enterprises' best interest to do a modification." Modifying a loan might lead to losses of 10 percent, an official there said, but a foreclosure would be more like a 50 percent loss.
Research on strategic defaulters suggests homeowners who are likeliest to take the plunge are those in markets where prices have dropped dramatically, Florida. After all, assuming housing prices return to their historic rates of increase, it could take decades to get back to a net-positive situation. And meanwhile alternative real estate is available to rent or eventually buy at much lower cost. Many borrowers are now taking a cold look at the numbers and deciding to bail. However, borrowers must realize that once they decide a strategic default is the best economic decision for their family, they should consult with a Florida Foreclosure Defense Attorney.
We knew last month that Fannie and Freddie were scared of walkaways when Freddie Mac Executive Vice President Don Bisenius scolded strategic defaulters on the company's website, noting that they not only hurt their own neighborhoods by lowering property values but also make it harder for everyone to get mortgages.
Since Fannie and Freddie are just now starting to offer loan mods to borrowers who ought to be able to pay, they most likely expect housing prices to continue to decline in many markets, pushing more borrowers to strategically default.
Unfortunately, the loan modifications that Fannie and Freddie now are offering to borrowers who didn't qualify for HAMP won't help escape the negative equity. Why? Because the modifications will typically offer reduced interest payments and deferred fees, not reductions in principal owed, so borrowers will owe piles of payments for years to come. However, what the loan mods will do is lower the size of the checks that borrowers have to write each month - and Fannie and Freddie seem to hope that this little bit of pain relief will be enough to make homeowners think twice about defaulting on mortgages. However, by doing nothing more than reducing interest payments and deferring fees, our government is simply offering a Band-Aid to those borrowers considering a strategic default.
Nice try Fannie Mae and Freddie Mac, but most borrowers will still find the arguments of an experienced Florida Foreclosure Defense Attorney and Dr. Brent White of University of Arizona Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis much more realistic.
As a Florida foreclosure defense and real estate attorney I educate and protect Florida homeowners, so get the legal advice you need, understand your rights, know your options and have a plan BEFORE taking action. Call me today for a FREE no-obligation consultation.