Efforts by Fannie Mae and Freddie Mac to recover money from strategic defaulters have yielded paltry results, prompting the investigator for their overseer to recommend more be done to recoup those losses, especially since they are likely to grow.
Last year, Fannie Mae and Freddie Mac recovered only $4.7 million from 35,231 deficient mortgage accounts it pursued that had a combined value of $2.1 billion, an audit by the Inspector General of the Federal Housing Finance Agency found.
The inspector general’s report, issued Wednesday, recommended that the FHFA strengthen its oversight of Fannie and Freddie’s recovery efforts and develop guidelines on what type of defaulted borrowers should be pursued.
“Given a recovery rate of 0.22 percent, the enterprises appear to have room for improvement in how they manage their deficiencies,” the report stated. “Further, with 1.1 million seriously delinquent mortgages looming on the foreclosure horizon — triple the enterprises’ foreclosures in 2011 — FHFA’s timely guidance on deficiency management processes may help the enterprises recoup future losses and protect taxpayers’ investment in their financial health.”
A strategic defaulter is a borrower who can afford to make their monthly mortgage payments but chooses not to do so and walks away from their commitment, letting the property fall into foreclosure. Strategic defaults have been an ongoing problem in the housing crisis, as the rapid decline in home values has wiped away borrowers’ equity in their properties and lessened their chances of ever recovering that equity.
The report noted that one potential class of strategic defaulters appears to be the two million or more individuals who bought vacation homes or investment properties between 2003 and 2007.
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In June 2010, the report noted, Fannie Mae said it intended to take legal action against strategic defaulters, and would bar those borrowers from received Fannie-backed loans for seven years.
As of June 30, Treasury has invested more than $187 billion in Fannie and Freddie to offset the losses accumulated. The report also noted that last year, 87 percent of the 341,738 foreclosed properties that were owned or guaranteed by Fannie and Freddie reverted back to agency ownership.
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