According to the Federal Housing Finance Agency (FHFA), government-controlled GSEs Fannie Mae and Freddie Mac could “recoup billions of dollars” if they could collect deficiency judgments from strategic defaulters, homeowners who made the decision to stop paying their mortgages and allow their homes to go into foreclosure even though they could still afford to make their mortgage payments. In recent statement, the FHFA said that the GSEs “have not been aggressive enough in going after strategic defaulters” and suggested that the two entities target strategic defaulters in the 30 states where deficiency judgments are legal[1]. One of the main reasons that Fannie and Freddie are in the red is that when foreclosed homes sell on the market today, they often sell for less than was owed on them by the former homeowner. Underwater homes are prime candidates for strategic default since homeowners often feel that they have little to gain by continuing to make payments on the property.

The FHFA noted in its report that pursuing deficiency judgments on strategic defaulters “could serve as a deterrent to those who would choose to strategically default on their mortgage obligations.” The FHFA criticized the GSEs for failing to even attempt to pursue former homeowners for deficiencies after their homes were sold in the wake of foreclosure, estimating that about 58,000 foreclosures with estimated deficiencies were simply abandoned – at a cost of some $4.6 billion. Although many of those foreclosures were likely the result of true financial hardship, “not going after defaulters where it is permissible to do so not only reduces the chances of recovering potentially billions [but]…incentivizes other borrowers to walk away from mortgages they can afford to pay,” said the FHFA[2].

Starting in January 2014, the FHFA will be closely monitoring Fannie Mae and Freddie Mac as they attempt to better collect deficiency judgments. Are you concerned by this? Do you think that strategic defaulters should receive special scrutiny from their lenders?