Strategic Default Can Make Sense, Right? Well, Not So Fast

Walking away from one’s mortgage, particularly a mortgage that is underwater, has increasingly become a viable option for homeowners who can no longer live by the terms of their mortgage […]

Walking away from one’s mortgage, particularly a mortgage that is underwater, has increasingly become a viable option for homeowners who can no longer live by the terms of their mortgage contract — a contract that stipulates that a homeowner pays the monthly payment, or have the bank take back the house.

It’s right there in the contract. Don’t pay, no house. Many homeowners see voluntary defaults as a very real option that, once upon a time, was considered anti-social and amoral and unthinkable for no other reason than making payments on your mortgage, no matter what, and had less to do with making the right financial decisions for the homeowner and family. There are even people who will offer advice as to how to walk away from your mortgage.

But now, inserted in House bill that would nearly triple the cap on annual premiums the Federal Housing Authority can charge borrowers and gives the agency more powers to protect itself from fraudulent or poorly-underwritten loans, is a measure that requires HUD to “rein in strategic defaults” on FHA loans, according to Dow Jones:

The amendment requires the HUD Secretary to define strategic default and work with lenders to block borrowers who default when they can still afford their mortgages from the FHA program. The amendment also requires HUD to use all its powers to ensure the FHA is sufficiently capitalized.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C, and regular Shelterforce contributor, who recently wrote a piece on giving homeowners in unwanted default on their mortgage loan the right to rent, points out the hypocrisy of such a measure, inserted by New York Rep. Chris Lee, a Republican, writing on Talking Points Memo that this is simply nanny stating of a different kind:

“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.”

Strategic default, he notes, is also standard business practice. Look no further than New York City’s Cooper Village and Stuyvesant Town — the massive housing complex whose owner strategically defaulted on the on the $4.4 billion debt used to help finance the deal.

Baker does not glaze over this double standard, of course:

“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.”

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