Strategic Default For Me But Not For Thee

Strategic Default For Me But Not For Thee

by digby

There's a been a rumbling from above for some time now that people who walk away from their homes when the economics no longer makes sense are behaving very badly. This is known as "strategic default" which simply says that homeowner looks at the numbers and determines that she is economically better off if she gives the house back to the bank .

Apparently this is immoral. Why this should be I don't know. The contract is clear. You pay or the bank gets to keep your equity and takes back the house. It's a collateralized loan, after all. That's the whole point. The person who does it suffers from the loss of all the money she has paid into the house and also gets a black mark on her credit record. The bank gets all the money and the property, which it can resell. Why this homeowner is considered to have made a moral transgression is beyond me. It's just a contract and the bank loses nothing in the the transaction.

However, our betters are getting very exercised over the little people deigning to make rational economic decisions on their own behalf. Indeed, just last month they decided to take action:
Taxpayer-owned mortgage giant Fannie Mae is targeting families by going after struggling homeowners who strategically default on their mortgage, the firm announced Wednesday.

A default is considered strategic when homeowners have the capacity to pay, yet choose to walk away from their mortgage. The trigger, researchers say, is negative equity: When the value of a home is less than what the lender is owed on it, borrowers are more likely to strategically default.


And Fannie Mae, an arm of the federal government and a big part of the Obama administration's housing policy, wants to make sure that if struggling families walk away, they suffer for it.

Homeowners who strategically default or did not work "in good faith" to avert foreclosure through other means will be ineligible for new Fannie Mae-backed mortgages for seven years. The firm said it will also pursue homeowners in court, seeking so-called "deficiency judgments" to recoup outstanding debt by seizing borrowers' other assets. Thirty-nine states do not limit the ability of lenders to recover what they're owed.

If this catches on, the whole field of contract law is likely to get very interesting. Collateral isn't good enough. Bad credit isn't enough either. Americans are apparently now pretty much signing themselves into indentured servitude for the term of a homeowners loan based on "good faith."

Well, probably not all Americans. This is the policy of Fannie Mae, working under the auspices of the Obama administration, which means they will only be going after lower and middle income people. And this is very good news because otherwise things could start to get a bit uncomfortable:
Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

When did housing become some kind of religious commitment? It is just another sour investment about which both contracting parties, the banks and the buyer, understood going in to be collateralized by the damned property. The difference is that middle class people who do this are called deadbeats and have their ability to function in our credit society severely limited, while the rich do not.
“I just decided to let it go, give it back to the bank,” he told the celebrity gossip TV show “TMZ.” “I just didn’t feel like it was a good investment.”

The rich and successful often come naturally to this sort of attitude, said Brent T. White, a law professor at the University of Arizona who has studied strategic defaults.

“They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest,” Mr. White said.

The rich and successful come naturally to this attitude because they understand how contracts work and don't get hung up on the Calvinistic notion that they should destroy themselves rather than return a piece of property to a bank.

Banks don't "feel" and they have no morals. They hold all the power to foreclose on you when you can't pay and exercise it without emotion. If it is in their interest to renegotiate they will try to do it. If it isn't, they won't. Corporations are required by law to act this way on behalf of their shareholders. As long as that is true, then the all the parties to these contracts have no choice but to do the same thing. It's just a financial transaction not a religious rite. This is a rigged game for average Americans and they should wise up.

Update: Pastordan writes in to explain that the Pharaohs had this all under control many moons ago:
From Exodus 5:

But the king of Egypt said to them, ‘Moses and Aaron, why are you taking the people away from their work? Get to your labours!’ Pharaoh continued, ‘Now they are more numerous than the people of the land and yet you want them to stop working!’ That same day Pharaoh commanded the taskmasters of the people, as well as their supervisors, ‘You shall no longer give the people straw to make bricks, as before; let them go and gather straw for themselves. But you shall require of them the same quantity of bricks as they have made previously; do not diminish it, for they are lazy; that is why they cry, “Let us go and offer sacrifice to our God.” Let heavier work be laid on them; then they will labour at it and pay no attention to deceptive words.’

Pharaoh gives the benefits, Pharaoh expects results, not slaves getting rational economic ideas in their heads.