(TheNicheReport) -- The controversial practice of intentionally walking away from a home encumbered by negative equity or an upside-down mortgage has been particularly damaging for the two government-sponsored mortgage entities, Fannie Mae and Freddie Mac. According to a recent report issued by the inspector general of the Federal Housing Finance Agency (FHFA), the efforts by Fannie Mae and Freddie Mac to mitigate losses from strategic defaults are disappointing.
Strategic defaults became prominent in the wake of the financial meltdown of 2008. After several banks succumbed to failure, the federal government moved in to rescue the institutions left standing. The term "too big to fail" entered the daily lexicon and a deep sense of apathy developed among taxpayers who were dismayed by the bailout. This apathy prompted many homeowners to walk away from mortgages they knew were headed for delinquency and default.
The FHFA report indicated that Fannie and Freddie are owed about $2.1 billion in deficiency judgments. The debt collection efforts on 35,000 debtors by Fannie and Freddie in 2011 brought in about $5 million, less than one percent of the total amount owed. The FHFA report points out that the number of deficiency judgments caused by strategic defaults is significant.
Identifying strategic defaults among hundreds of thousands of foreclosures is not a simple task, but the FHFA report references a high number of borrowers who defaulted on investment properties and homes used for vacation purposes. Other borrowers may have shunned alternatives to foreclosure like mediation or loan modifications. In order to prove a strategic default, a mortgage lender must prove that the borrower had the means to make timely mortgage payments but chose to simply walk away instead.
Celebrity Strategic Defaulters
In 2008, former Major League Baseball star player Jose Canseco made headlines when he walked away from a $2.5 million mortgage on a home in Southern California. Mr. Canseco told the press that paying for that mortgage no longer made sense and that it was not an emotional issue for him.
By late 2010, renowned Hollywood actor and Oscar-nominee Nicholas Cage had already turned in the keys to four luxury properties. Earlier in that same year, the New York Times published a study that showed the prevalence of the strategic default practice among upper-class borrowers: One in seven delinquent mortgages were attached to homes valued at more than a million dollars.
Fannie Mae actively identifies and pursues strategic defaulters by contracting third-party collection agencies, but Freddie Mac does not have such methods in place. Both entities discourage borrowers from walking from their mortgages by locking them out of the home loan application process for seven years.