Underwater and the Strategic Default PR Campaign, 2: FHA and the problem of a definition.

In a move that I’m assuming is market testing a potential new “welfare queen” meme, House Republicans attached an amendment to penalize strategic defaulters by barring them from getting Federal Housing Administration-backed loans in the future. Ryan Grim:

The GOP offered its provision as “motion to recommit,” which is one of the minority party’s few ways to amend a bill on the floor. Known as an MTR, the motion is generally stripped out in the Senate if it is adopted in the House. Such measures are put forward more to score political points than to craft policy, but the mood of the House can sometimes be gleaned from the vote’s outcome. In this case, Democrats chose not to fight, and accepted the motion with a simple voice vote.

Annie Lowrey has more.

The obvious questions, now that Republicans may push this hard and Democrats won’t fight it, are, “What is a strategic defaulter? And when should be penalize them?”

I’ve still seen nothing that makes me think most strategic defaulters are not simply moving to follow jobs in this economy. In February I ran an email from a reader who walked away so he and his wife could move to a new city to get a much better job and have a child. They tried very hard to short-sale or work something out with the bank, which was non-responsive. The bank is currently refusing to foreclose, and still hits their credit every month with a non-payment, which is worse over time than the foreclosure.

Because of this, I’d argue we need to investigate, in Barry’s words, strategic non-foreclosures as a major national problem. And if anything, piling on underwater homeowners who are trying to find some middle-ground to keep their heads above water is distracting us from strategic non-foreclosure — the real, major, nationwide problem — as well as issues for why banks aren’t meeting desperate underwater homeowners halfway.

But back to the question: should the government penalize this family? Labor mobility is one of the strengths of this country. And given almost double-digit unemployment and 16.6% U-6 underemployment, shouldn’t the ability of people to find jobs in new places, opening jobs for those seeking them, be a priority?

How to figure out who can pay?

I knew that the definition part was going to become a political battle back in February, when I listened to a one-hour radio discussion from Nevada on strategic default starring Felix Salmon and Megan McArdle. Megan was the anti-strategic default voice (though I think it is fair to say because she is worried it’s going to put the good parts of our bankruptcy laws and consumer protection at risk).

Forty-three minutes into the show a woman called and described how she and her husband had a fine home and a good mortgage, but both became unemployed for a period of time. They fell behind on their mortgage but got back on their feet months later. The bank called, wanting to jump their $1,500 payment to $2,200 in order to capitalize on the lawyers fees and late fees and get the mortgage back on track, presumably into subprime category. The couple did this, and, in her words, “let her car go, let everything go, there were days where we were eating rice….” They called and just wanted their old mortgage back, and the bank wouldn’t listen or even engage them over the course of a year, even though they had put $70,000 down. The bank said they didn’t care unless they had the full principal. They moved down the block to rent.

Megan responded that they were right to walk away. That they shouldn’t live on rice. This worried me, because the servicers, the bondholders, the banks and everyone that will be on the other side will think that it is perfectly reasonable that this homeowner should live on rice and let their car go to make every last payment they can squeeze out of the person.

This isn’t an exaggeration. The quickest source I can grab is Alyssa Katz’s Our Lot (p. 67). The formula in the 1990s subprime lender United Companies’ handbook for determining whether or not to lend to someone was that borrowers just needed $400 a month left in their budget for each household member for all their non-housing expenses. The rest would go to United Company. That’s rice and not fixing your car money. And that’s representative of the whole mindset of these lenders.

Debt collectors and mortgage servicers will not think you need to have some sort of quality of lifestyle. They’ll think you should be eating rice and getting a third job in order to pay, whatever it takes, and they won’t engage borrowers unless they have the full payment. Is this the mindset that our government needs to be legislating?

It’s not, because all evidence tells us that people are breaking themselves in half to make these payments, but the lenders aren’t or can’t meet them halfway. I’d like to see some high-end research that sees if so-called “strategic defaulters” have similar mobility characteristics than non-strategic defaulters. As well as the extent to which they have tried to work out some sort of arrangement with the bank, and what stopped that arrangement from going through. Foreclosures are devastating for both parties and lenders should be willing to work out deals. Why aren’t they? Is it simply a securitization problem? An issue of playing “make believe” with the books? We need to figure this out before the government is mobilized against the people.