They Just Don't Get It

Our ruling elites and their mainstream media shills never really have cared what was good for the population, or even what we want or believe, but they used to listen to us well enough to at least feed back the lies we most wanted to hear. However, in their response to the financial debacle, they've shown that not only do they not give a damn what we think, but that they have no idea what it is we really do want or believe or expect. 

Never have they read us so wrong as in the government response to the financial debacle and the cures proposed. Now, after committing over a trillion dollars to goosing the house market in an attempt to rewrite the laws of supply and demand by floating more bad loans that will result in more defaults, and pouring hundreds of billions into FHA and the GSEs such as FNMA and FMAC, a few people up there perceive the threat to what remains of our credit system, and realize that the bleeding has to be stopped. Lawmakers have proposed not only tightening the lending rules and underwriting standards for loans purchased by the GSEs, but punishing people who strategically default by locking them out of the government-backed loan market for 7 years, during what time they would not be able to qualify for a loan backed by a government agency. That means they would not be able to get financed for a house, period, because 95% of all home loans written these days are either purchased by Fannie, Freddie, or Ginnie, or are written by the FHA, which has combined delinquency and default rates for its 2007 and 2008 vintage mortgages of over 20%.

Yet there remains the fear that Fannie's punitive new policy might not make it with the public. Writes David Streitfeld in the New York Times, "Fannie Mae’s decision to begin punishing people who walk away from their unpaid mortgages could prove difficult to sell to the public and might be impossible to execute, housing and lending experts said Thursday."

Uh, just what sector of the "public" would be unhappy with policies that punish people who walk away from mortgages that they can pay for? Most of us out here feel that the only foreclosure victims who rate sympathy are those who are unemployed or whose businesses have gone down the tubes in this dismal economy, yet these are the very people who are ineligible for assistance and get the least help, and we're furious at the lawmakers who are continuing to subsidize more home building and more bad borrowing under the auspices of the FHA and government-backed GSEs while cutting off the lifelines of millions of unemployed who will be left stranded with no income whatsoever at the end of this week.

A "strategic defaulter' is a borrower who has the ability to pay but is defaulting only because his house is worth less than what he paid for it. These people tend to be much more affluent than the average foreclosure casualty and they are defaulting as part of a larger financial plan. They usually have absolutely no remorse, and plan to buy within a few years when they feel that prices have reached levels justified by rents on comparable housing. And so far, there has been nothing to prevent them from buying within a couple of years of foreclosure if they have something for a down payment, even though mortgages are considerably more difficult to get than they were a few years ago.

If there's any group of defaulting homeowners the public has no sympathy for, it's these well-heeled borrowers who can pay their mortgages but are walking away because they just don't want to pay. After all, not only do renters, who derive no benefit at all from efforts to support housing prices and help buried homeowners, make up 40% of the general public, but most homeowners are not delinquent on their mortgages and tend not to sympathize with people who deliberately default. The only part of the "public" that will be unhappy are scamming borrowers, and the housing and lending hustlers, who were the only people who benefited from the Great Rampage of the 00s, and who have shoveled billions into lobbying for the HOPE NOW and other mortgage assistance programs, as well as ever more subsidies for housing "affordability" programs.

Strategic default is now becoming a fad among affluent homeowners whose expensive homes have dropped catastrophically in value, and threatens to topple what remains of our credit system.Tighter lending policies and steep penalties for defaulting borrowers who have the capacity to pay their loans are way overdue. The Republicans additionally have introduced a measure to the FHA financing bill that would forbid strategic defaulters from getting a loan from FHA. This is a completely justifiable measure and is only one of many reforms necessary to prevent another massive credit bubble from forming as this one deflates.

However, there's one question that has to be on everyone's lips, which is, how will we punish major corporations who default on mortgages worth tens of millions, for the same reason- that the properties involved have dropped steeply in value since purchase? These entities have set a example for the rest of the population, and there's nothing that angers people so much as the vicious double standard that exempts major corporations, especially financial concerns, from major wrongdoing while punishing hapless individuals lacking wealth and influence. Will J P Morgan's strategic default on a portfolio of commercial properties in San Francisco impair their ability to obtain credit down the road? Will corporate defaulters incur penalties proportionate to those imposed on individual homeowners?

We'll believe that our rulers are truly committed to reform when the financial concerns who benefited the most are subjected to the same penalties for irresponsibility and malfeasance as the rest of us.