The Conservative Nanny State Strikes Again
The supposed free market fundamentalists are once again running to get a helping hand from Big Government. Apparently, the Republicans are outraged over the fact that many homeowners are now "strategically defaulting" on their mortgages. They have stopped paying a mortgage even though they can still afford the payment because they decided that they would be better off just giving the house back to the bank. There have been some press accounts talking about strategic defaulters who have used their savings to buy a new car or even take a trip to Europe.
This has outraged Republicans in Congress. They have now proposed a bill to have the government punish strategic defaulters by denying them the option to receive a loan insured by the Federal Housing Authority (FHA).
It is important to get some perspective on the issue here. Strategic defaulters are following the terms of their contracts to the letter.
The mortgage contract requires a homeowner to pay a mortgage in order to stay in possession of the house. The penalty for not paying the mortgage is that the bank gets to retake the house.
Banks know (or are supposed to know) when they issue a mortgage that there is some probability that the homeowner will not repay the mortgage. One of the reasons that homeowners may not repay the mortgage, and cause the banks to lose money, is that the home falls in value. Banks should have incorporated this risk into the interest rate they charged on the mortgage.
Since nationwide house prices have fallen 30 percent since the peak of the bubble, and much more in some areas, there are millions of homeowners who would do better by turning over their home to the bank than by continuing to pay their mortgage. Now many homeowners are taking advantage of this option to the detriment of the banks or other holders of the mortgage.
Rather than respecting the sanctity of contract, the Republicans want to punish homeowners who look out for their own best interest and strategically default. Hence they want to prohibit them from later getting a loan that is insured by the FHA. Who knows what other sanction they may look to impose. Maybe they will also prohibit strategically defaulters from getting a loan through the Small Business Administration or allowing their children to getting a government guaranteed student loan.
It is worth noting that strategic default is a standard business practice. There was recently an incident in which Morgan Stanley strategically defaulted on the mortgage of a large property in its possession, deciding it was better just to turn it back to the lenders. There haven't been any calls by the Republicans in Congress for punishing Morgan Stanley - say by banning them it from government contracts.
We also have to look at this issue from the other side. Do we think that bankers are too stupid to understand contracts? Do Citigroup and J.P. Morgan need the government to hold their hand when they issue a mortgage, making sure that these banks fully understand the terms of the contract that they have issued? Maybe the government should require that all mortgage contracts are written in big type and simple language so that highly paid bank executives will understand the terms of the mortgages that they are selling.
Actually, the Republicans are doing the country a valuable service by showing us in the clearest possible terms that they couldn't give flying f*** about the "free market." They are about redistributing income upward. If they can rig the rules of the market to get the income flowing upward, that's great. But, if it takes the big hand of big government to make sure that the money goes to their friends, then they have no qualms about going this route also.
The truly remarkable part of the story is that so many progressives feel obligated to do the Republicans' work by attacking them as "free market fundamentalists." People who want to use the government to change the terms of a contract after the fact to help banks have no interest in the free market. These people are about taking money from everyone else and giving it to the rich: end of story.
Progressives do these Republicans an enormous favor by calling them "free market fundamentalists." It is far better to be acting in the name of a belief in the free market than to be acting in the service of the rich. The Republicans are clearly doing the latter, progressives should stop telling people that their actions have anything to do with a principled commitment to market outcomes.
Also, the banks can stop any strategic default they want by offering a principal writedown, thus taking all of the strategy out of the default.
June 10, 2010 2:37 PM | Reply | Permalink
I suspect there are very few really canny strategic defaulters out there--there's an exception to every rule, but I don't know anyone fal who's gone through a foreclosure or short sale without fal bak stressing their relationships, decimating their credit türkçe günlük burç yorumları günlük burç izle seyret fallar bak günlük burç rating and taking a huge hit to quality of family life. It's not really walking away for most people--it's more like crawling away. günlük burç
January 24, 2011 9:12 PM | Reply | Permalink
This really is just another example of IOKIYAR. In this case, the R might stand for Robber Baron instead of Republican, but for practical purposes the two are the same anyway. Keynes is often attributed the quote, "If you owe your bank 100 pounds, you have a problem. If you owe one million, it has." It's all fine a good when corporations or billionaires walk away from secured loans and surrender the collateral, but that's because they're Robber Barons, and what's good for them is good for the Republican party, and thus, somehow, we're supposed to believe is good for America. If a prole dares to follow the example of his betters and attempt to walk away from a bad secured loan he has obviously forgotten his proper, servile place, and needs to be punished.
June 10, 2010 3:22 PM | Reply | Permalink
Uh, no, it's not. It's much more than that. Do you think it improves things by channeling every valid criticism of Republicans into the same standard Democratic talking point ("IOKIYAR") - which Republicans have no trouble ignoring and which may sound to some like "whining" instead of taking up a fresh new frame, as Baker has done here.
Are we talking to ourselves or trying to talk outside our small group.
June 11, 2010 1:55 PM | Reply | Permalink
what's more, if the 'punishment' for strategic default on a mortgage is that you can't get an FHA mortgage, this only punishes defaulters in the lower rungs of the housing market. anyone who strategically defaults on a million dollar house isn't gonna be in the market for an FHA mortgage.
and i guess i don't understand how exactly they are proposing to determine whether a mortgage default was 'strategic' or not. is there actual language out there? i couldn't find any. all i could track down was some puffery from one of cantor's windbags.
June 10, 2010 3:38 PM | Reply | Permalink
Another partisan Republican political ploy which may well sell this coming November.
Note: Mortgage defaults, strategic or otherwise, hurt the taxpayers more than they hurt the banks. The Fed has bought some $1.5 trillion of MBSs; the GSEs are totally and completely backstopped by the FDIC (which doesn't have the money it's promised them); FHA has been buying mortgages hand over fist.
Of the 11.2 million mortgagors who are underwater 4.9 million borrowers are candidates for strategic default (underwater by more than 25%). Only a minority of those will take the option to strategically default.
Against those possible strategic defaulters there are 35.5 million mortgagors with positive equity few of whom would even contemplate strategic default, and another 14.5 million who own their homes free and clear of any mortgage.
That's an overwhelming number of home owners who are not likely to be swayed by Dean's arguments -- especially if they believe they'll be picking up the tab for the cost of the strategic defaulters' defaults.
Sounds like the Republicans have a winning position.
June 10, 2010 4:21 PM | Reply | Permalink
Correction.
It was the Treasury that extended the guaranty to Fannie and Freddie -- not the FDIC. At the time (12/2009) Dean said the guaranty looked "like the original TARP" and was a backdoor way of further bailing out the banks.
June 10, 2010 4:29 PM | Reply | Permalink
I just started trying out automated forex trading and i am loving the results because it looks like
i wont need to get a mortgage refinance after all!
February 18, 2011 6:12 AM | Reply | Permalink
If presented both, my guess is most people are going to buy Dean's argument over yours. I sure do. I'm in a contract with my bank, that doesn't change if someone else defaults.
It seems what you are really arguing is, once again, that the big guys deserve trillions of taxpayer dollars. While homeowners - who got zero help - can't even work within their own contracts because the banks screwed us on the back-end protecting their risk with our tax dollars and it might increase this burden in a comparatively minute fashion. That is fucking insane if I understand what you are saying.
I propose a compromise. Any financial institution that engages in strategic default or accepts a capital infusion from the government (through TARP or by any other back-door means) is no longer able to borrow from the Fed. Then, leave the homeowners alone to do what they have to do. THAT is a winning position.
June 10, 2010 4:50 PM | Reply | Permalink
I'm in a contract with my bank, that doesn't change if someone else defaults.
Except that taxpayer monies* will pay for that someone else's default.
* As an aficionado of modern monetary theory I don't really believe that "taxpayer money" pays for the bailouts. But everyone else on this board seems to. So, when it supports my argument, I'll use it.
June 10, 2010 7:53 PM | Reply | Permalink
Take what Ellen says with a grain of salt (make that a whole salt shaker). She has been shilling for the big banks and financial institutions ever since she started posting here.
Her stance that a "strategic default" won't hurt the banks is predicated on the idea that Congress and the US taxpayer will protect those BIG banks from any and all losses resulting from any "strategic defaults".
Let's hope that isn't true although precedent is on her side.
.
June 11, 2010 10:10 AM | Reply | Permalink
Don't pay attention to Ellen. I'm sure she is a bakers secretary and sits in his lap and takes dicktation.
June 11, 2010 8:57 PM | Reply | Permalink
Do "strategic defaults" by home owners differ from defaults by commercial borrowers?
It is understood that if a commercial borrower's cash flow will not support its mortgage payments, then, the sensible course of action is to default -- assuming no personal obligation on the underlying debt and a mortgage which is under water. As Tishman Speyer pointed out, "The rental income did not cover the monthly debt service."
For those who support "strategic defaults" by homeowners I suggest mirroring the commercial borrower's practice by looking at "owner's equivalent rent" -- that is the implied cash flow used by the government to calculate inflation. If owner's equivalent rent is less than the mortgage carrying charges, then, all things equal a default is sensible and appropriate.
Level the playing field.
June 12, 2010 1:01 PM | Reply | Permalink
Well, as usual another idiotic blog from you. Let me point out a few things. First, if you default on a mortgage, the bank does not have to accept the house as collateral and call the loan paid. If the resale of the home is for less than the amount owed, the bank can go after the borrower and attach his wages if necessary. You are not off scott free. They have 5 years to decide to pursue you for this money. Second, why the hell should the taxpayer insure a loan through the FHA for someone who INTENTIONALLY DEFAULTED on their previous loan? Is that a good business decision, to guarantee someone known to be unreliable? With my money? And thirdly, if this behavior becomes common, you can bet banks will respond by jacking interest rates to the moon and requiring strict limits on mortgages, so many people will be locked out of the market. Good idea.
June 10, 2010 5:30 PM | Reply | Permalink
I'm pretty sure the free market (if one remains in this country) will find a way to reach out to strategic defaulters, especially those who maintain good payment history on other loans and financial responsibilites.
Such an organization might make default, strategic or otherwise, a condition of membership, and be called the "Homeowners' SCRUUB Co-Op," with SCRUUB being an acronym for "SCRew U, Underhanded Banks!"
:^)
Please cite the source for your statement that banks can go after a borrower after foreclosure. My understanding is that return of the property satisfies the contract for a first mortgage, and that only 2nd/third mortgage banks can pursue the homeowner for money once the home has been returned to the bank.
June 10, 2010 6:26 PM | Reply | Permalink
http://blogtheholmgroupaz.com/2010/02/03/cnn-money-mortgage-lenders-pursue-homeowners-even-after-foreclosure/
It is called a deficiency judgment, and it can even apply to approved short sales. You are not off the hook as Baker tries to imply.
June 10, 2010 6:41 PM | Reply | Permalink
Actually, cleverbulldog is right on this one. The bank can resell the house them come after you for the difference. Even the five year statute may not apply, because the bank can sell the loan diff to another company, and than that company can come after you pretty much in perpetuity.
June 10, 2010 7:14 PM | Reply | Permalink
In some states, but in non-recourse states (like Florida and California--two states with lots of defaults) you can just walk away from the loan and the bank has to settle for the house.
June 10, 2010 9:48 PM | Reply | Permalink
California yes, but not Florida.
June 10, 2010 10:24 PM | Reply | Permalink
Well, there you have it. I guess you have to hope your bank does a non-judicial foreclosure--or go through the pain of short sale and make sure to negotiate a full release of obligations.
Really canny strategic defaulters could, of course, stash their house payment money in a sock and then use it to settle the judgments after the fact.
In the end, I suspect there are very few really canny strategic defaulters out there--there's an exception to every rule, but I don't know anyone who's gone through a foreclosure or short sale without stressing their relationships, decimating their credit rating and taking a huge hit to quality of family life. It's not really walking away for most people--it's more like crawling away.
June 11, 2010 3:33 AM | Reply | Permalink
Exactly. Walking away from your mortgage is not a free ride as many would suggest. It usually leads to years of financial stress and all the other repercussions of a bad FICO score. Corporations can walk away from a loan any time they want with little or no repercussions, but that is not really an option for the rest of us.
June 11, 2010 8:58 AM | Reply | Permalink
If the resale of the home is for less than the amount owed, the bank can go after the borrower and attach his wages if necessary. You are not off scott free. They have 5 years to decide to pursue you for this money.
Doesn't that vary from state to state?
June 10, 2010 7:53 PM | Reply | Permalink
Yes, Judgements on deficiency can be obtained in 30 states.
June 10, 2010 7:57 PM | Reply | Permalink
Glaivester! Would you stop being so damn polite!
June 10, 2010 7:57 PM | Reply | Permalink
Clearly you went to the same clown college as Robert Reich, you are proposing to make real estate a guaranteed no risk investment. If prices go up, you profit, if they go down, the bank loses. So tell me, how eager do you think banks will be to make home loans? Expect 50% down payments, private insurance, strict debt limits, and high interest rates. Like in "It's a wonderful life", everyone will be forced to live in Potterville rental homes, unable to every buy a home of their own.
June 10, 2010 5:58 PM | Reply | Permalink
I have to admit that someone who intentionally defaults on a mortgage sounds like a pretty poor credit risk for the FHA.
I can't imagine though how anyone can realistically weed out "strategic defaulters" from all of the people who genuinely can't make their payments.
June 10, 2010 7:46 PM | Reply | Permalink
By looking at their assets, their income, and their debt.
June 10, 2010 7:55 PM | Reply | Permalink
I'm not too sure about what the actual law says, but let's assume that this is so. The problem here is the same one it always is: banks are avoiding anything that will cause their properties to be valued (cramdown is another biggie) because they really don't have a lot of financial room to maneuver in. They are, in fact, undercapitalized and in reality are zombies who can't cover their debts.
Of course, eventually, after about ten years of so of borrowing money from Uncle Sammy for free and then socking it away in T-bills and the like, they'll be able to climb out of the hole and can open their books so that everyone can see that they really are solvent.
But in the meantime, all we can do is pretend that they are, and not look to closely. If foreclosures become endemic, that could rip the facade right off. That's what has got certain people in a tizzy.
June 10, 2010 8:39 PM | Reply | Permalink
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June 11, 2010 10:08 AM | Reply | Permalink
I couldn't agree more, the banks made the lending decision, they should be left to sweat it out. on the upside, they could rent out those properties while they wait for the market to recover.
June 11, 2010 12:08 PM | Reply | Permalink
No, the borrower made the borrowing decision. It was his investment, not the bank. The bank didn't go to him and say buy this house. You want a scenario where the bank takes all the risk and you get all the gain, well that's fine. Expect that as a result banks will not lend money to the vast bulk of people. Private home ownership will be a thing of the past.
June 11, 2010 4:11 PM | Reply | Permalink
The bank is only taking "all the risk" in situations where the bank is stupid enough to not require a decent down payment. In that case, let the supposedly sophisticated financial instituion beware!
Let the contract play itself out as written.
Still, I don't see why intentional defaulters should have sufficient credit rating standing to get additional FHA loans. They seem like risks.
June 12, 2010 1:52 AM | Reply | Permalink
FNMA is working on such a program now--but it raises the problem that if banks control so much of the housing market, they will simply refuse to sell housing at low prices, and and thus prevent housing from dropping to "true" market prices.
How much is housing worth in the USA? Who knows?
June 12, 2010 1:25 PM | Reply | Permalink
"How much is housing worth in the USA? Who knows?"
Any house in the USA is worth whatever the owner is willing to sell it for, and somebody else is willing to pay for it.
.
June 13, 2010 10:15 PM | Reply | Permalink
It's that second part of the sentence that makes valuing housing so difficult right now.
It's tough to appraise something that nobody's offering to buy.
June 14, 2010 12:59 AM | Reply | Permalink
If the asking price is low enough, there will be buyers.
.
June 14, 2010 5:34 PM | Reply | Permalink
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June 11, 2010 10:36 PM | Reply | Permalink
While I agree with the spirit of this article (let the banks take their losses; they of all actors should have known the risks well), I think it's stretching things to say that this bill would harm "the sanctity of the contract."
As far as I can see, this bill does not actually modify the contract. It just changes the rules about what can happen in future contracts.
June 15, 2010 6:05 PM | Reply | Permalink
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February 7, 2011 9:46 AM | Reply | Permalink
I couldn't agree more with your post! The florida mortgage rates are insanely expensive right now so i may need to look into getting a cash out refinance but that will cause me to lose a big percentage of my money invested.
February 18, 2011 6:12 AM | Reply | Permalink
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February 22, 2011 9:26 PM | Reply | Permalink
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There are around 35.5 million mortgagors with positive equity few of whom would even contemplate strategic default, and another 14.5 million who own their homes free.
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