Wednesday
October 22, 2014

Commentary: Hunt for Strategic Defaulters Overstated

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Commentary: Hunt for Strategic Defaulters Overstated

Recent media reports have suggested that the FHFA, Fannie Mae, and Freddie Mac will start to take severe legal action against strategic defaulters. But are mortgage cops really going to chase down these individuals with the goal of locking them up?

A Sept. 13 article in the Chicago Tribune titled “Mortgage Cops Taking Tough Stance” suggested in dramatic terms that federal officials were on the hunt for strategic defaulters — home owners who allow their mortgage to go into default even though they have the financial wherewithal to keep paying.

“Strategic defaulters, beware,” the piece said, “The feds are coming for you. And they are not happy.” The issue has been a high-profile one lately because the number of strategic defaulters has ramped up considerably during the housing downturn.                               

The piece went on to quote an official in the Federal Housing Finance Agency’s (FHFA) Office of Inspector General (OIG), who said that it would go after people trying to buy in today’s improved housing market if they have strategically defaulted in the past and are lying about it in their new mortgage application. “We’re not just going to demand repayment,” the piece quoted OIG official Heath Wolfe as saying. “We’re going to lock (people) up.”

Wolfe and other federal officials said the OIG is working with secondary mortgage market institutions Fannie Mae and Freddie Mac to devise ways to sift through the companies’ databases of some 18 million mortgages to identify home buyers who strategically defaulted. To weed these people out, they’ll look for “borrowers who failed to mention on their loan applications that they had previous mortgages they did not pay,” the piece says. And it quotes Wolfe estimating that the federal government could get back some $1 billion in defaulted mortgages from borrowers that are referred to law enforcement officials for prosecution. “It’s not a lot, perhaps, in the greater scheme of things,” the piece says. “But Wolfe’s mission is to get back as much of it as he possibly can.”

But are mortgage cops really chasing down individual strategic defaulters with the goal of locking them up? If so, that’s important for real estate professionals to know. Although financial strategies and consequences related to mortgage default should be discussed with an attorney or an accountant, it’s important for practitioners to be aware of the risk and concern of strategic defaults if in fact the OIG is using its resources to find and prosecute individuals who’ve engaged in them. 

However, the OIG may not be planning as aggressive an enforcement operation as was characterized in the piece. Steve Linick, head of the FHFA’s OIG office, says the article overstates the case.

In a September 25 op-ed in DS News (an online trade publication on default servicing) titled “Placing Our Mission in Perspective,” Linick writes it is “not the case” that his office  “is going to ‘lock up’ anyone who strategically defaults on their mortgage. “My office is not ‘on the prowl for people who owe [Fannie Mae or Freddie Mac] money.’ We are, however, committed to combating mortgage fraud and improving the effectiveness and efficiency of FHFA’s programs and operations.”

To that end, he says, his office is auditing FHFA’s oversight of how Fannie and Freddie recovers losses from foreclosure sales, and looking at how the companies handle strategic defaulters is part of that. What will come out of that effort will be recommendations for improving oversight of the two companies and how they recover funds. “This constitutes the extent of our current work on strategic defaulters,” he explains.

In addition, his office is working closely with federal, state, and local criminal and civil law enforcement agencies to combat mortgage fraud generally, which includes abuses in the foreclosure process. “In sum, the [Chicago Tribune] article overstates the nature and extent of our work on strategic defaulters,” he says.

On Oct. 17, the OIG released an audit report in which they state that “the Enterprise has developed a methodology to identify potential strategic defaulters and to send this information to its vendors to pursue collection.” (They use the term “the Enterprise” to refer to Fannie Mae and Freddie Mac.) The statement makes it clear strategic default is an issue of significant importance to the OIG.

As an attorney who is immersed in real estate matters, the idea in the Tribune piece that the OIG is pursuing strategic defaulters on an individual level struck me as surprising, but as the op-ed by Mr. Linick and the audit report released this week make clear, the OIG is certainly looking for ways to mitigate the damage caused by mortgage defaults.

A representative from the OIG office confirmed to me that the agency stands by the information in the op-ed piece by Mr. Linick and reaffirmed the agency’s position that the information in the Chicago Tribune article is either inaccurate, out of context, or exaggerated. (I also spoke with the writer of the Tribune article and he stands behind his account.)

That said, strategic default will almost inevitably have some form of consequences for home owners.  This might include — but won’t be limited to — damaged credit and the possibility of a primary or secondary lienholder pursuing the unsatisfied debt in states where this is an available remedy under applicable law.  However, sending out “mortgage cops” to pursue and lock up individual strategic defaulters does not seem to be on the OIG’s agenda, notwithstanding the dramatic account in the Tribune. Hopefully this piece will help reinforce Mr. Linick’s op-ed and provide more clarity on the issue.

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