44 Pages Posted: 17 May 2013 Last revised: 3 Sep 2013
Date Written: May 2013
Strategic default – the practice of opting to default on an underwater home mortgage when the mortgagor has the ability to pay – has been a significant exacerbating factor in the mortgage crisis and its accompanying economic upheaval. The practice is fostered by states that limit or prohibit personal recourse on mortgage obligations. As a result, strategic default is a more pervasive problem in these states than in their recourse brethren.
State law determines whether a lender can get a deficiency judgment against a mortgagor; however, the federal government is mostly paying for the mortgage crisis – the Fannie Mae and Freddie Mac conservatorship and other mortgage-relief programs have already cost the federal government close to $200 billion. It is unreasonable for the federal taxpayer to foot the bill and yet be subjected to this maze of state laws when it comes to recovering deficiencies, especially from strategic defaulters. This article advocates congressional adoption of a uniform deficiency law for residential mortgages. We conclude that Congress should preempt state non-recourse law by enacting legislation based on Section 8.4 of the Restatement (Third) of Property: Mortgages. Should Congress find such preemption politically unappealing, we advocate that federal agencies such as the Federal Housing Finance Agency (FHFA) accomplish the same result through the regulatory process. Absent such an approach, the use of the differential guarantee fee by FHFA with respect to mortgages guaranteed by Fannie Mae and Freddie Mac is a promising alternative and represents sensible and desirable public policy. States that choose to use state law to impose greater costs on federal taxpayers and borrowers in other states should be willing to pay the price.
Keywords: strategic default, mortgage, Freddie Mac, Fannie Mae, taxpayer, deficiency law, residential mortgage
Suggested Citation: Suggested Citation
Nelson, Grant and Serbulea, Gabriel D., Strategic Defaulters versus the Federal Taxpayer: A Brief for the Preemption of State Anti-Deficiency Law for Residential Mortgages (May 2013). Arkansas Law Review, Vol. 66, No. 1, 2013; Pepperdine University Legal Studies Research Paper No. 2013/8. Available at SSRN: https://ssrn.com/abstract=2266034