Posted by AzBlueMeanie:
There is one set of rules for the über-rich, and one set of rules for the rest of us.
Congress is trying to add no-default provisions to FHA mortgages to prohibit "strategic defaults" by mortgage holders who are under water on their mortgage, i.e., the mortgage is more than the current market value of the home. Congress May Bar Strategic Defaulters From FHA Loans:
The House of Representatives [has] approved a measure that would bar borrowers who had strategically defaulted on a mortgage from being able to obtain a loan insured by the Federal Housing Administration.
The measure, attached to a bill that would give the FHA greater flexibility in how it conducts business, illustrates the growing concern that more homeowners may walk away from homes that are worth far less than their mortgages, even though they have no problem paying their loan.
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Rep. Chris Lee (R., N.Y.), speaking on the House floor, said more stringent penalties were needed to discourage borrowers from strategically defaulting. “If a borrower makes the decision to strategically default on a loan, they certainly should not be allowed to benefit from a government-subsidized program,” he said.
Under the 2009 conventional loan limits announced by the Federal Housing Finance Administration (FHFA) the general limit is $417,000. But the concept of one conventional loan limit is gone. As FHFA explains, “regardless of the area median home price, the loan limit cannot, in general, exceed $625,500 (1.50 times the 2009 conforming loan limit). Loan Limits Become Complex in 2009 | FHA Mortgage Guide
It is safe to say that the über-rich are not taking out FHA loans for their multi-million dollar "McMansions," so the proposed restrictions against strategic defaults will not apply to them. But that is where the biggest problem lies.
The New York Times reported last week that the biggest defaulters on mortgages are the rich. Walking Away From Million-Dollar Mortgages:
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.
“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.
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The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.
The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.
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“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”
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"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.
So what is acceptable as a rational investment decision without any moral shame for the rich is a moral hazard to be condemned and penalties to be imposed for everyone else.
In addition to the no-default rules in Congress:
Fannie Mae and Freddie Mac, the two quasi-governmental mortgage finance companies that own most of the mortgages in America with a value of less than $500,000, are alternately pleading with distressed homeowners not to be bad citizens and brandishing a stick at them.
In a recent column on Freddie Mac’s Web site, the company’s executive vice president, Don Bisenius, acknowledged that walking away “might well be a good decision for certain borrowers” but argues that those who do it are trashing their communities.
The correct approach to the problem of under water mortgages is twofold: first, Congress needs to authorize a "cramdown" rule in Bankruptcy proceedings for owner-occupied residences. This would permit the Bankruptcy court to rewrite the terms of the mortgage. Second, Congress needs to revive the Home Owners Loan Corporation from the Great Depression, which operated similarly to the Resolution Trust Corporation of the 1980s and 1990s following the Savings & Loan scandal. From the New Deal, a Way Out of a Mess – New York Times:
The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks — most of which were delighted to trade them in for safe government bonds — and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury.
The scale of the operation was impressive. Within two years, the HOLC received about 1.9 million applications from distressed homeowners and granted just over a million new mortgages. (Adjusting only for population growth, the corresponding mortgage figure today would be almost 2.5 million.) Nearly one of every five mortgages in America became owned by the HOLC. Its total lending over its lifetime amounted to $3.5 billion — a colossal sum equal to 5 percent of a year’s gross domestic product at the time. (The corresponding figure today would be about $750 billion.)
As a public corporation chartered for a public purpose, the HOLC was a patient and even lenient lender. It tried to keep delinquent borrowers on track with debt counseling, budgeting help and even family meetings. But times were tough in the 1930s, and nearly 20 percent of the HOLC’s borrowers defaulted anyway. So the corporation eventually acquired ownership of about 200,000 houses, nearly all of which were sold by 1944. The HOLC closed its books in 1951, or 15 years after its last 1936 mortgage was paid off, with a small profit. It was a heavy lift, but the incredible HOLC lifted it.
These practical solutions are, of course, opposed by the financial services industry which created the real estate bubble and is responsible for the financial collapse, and their Republican allies in Congress who want to preserve the regulatory status quo. As House Minority Leader John Boehner said recently, the greatest economic calamity since the Great Depression was just "an ant" that we should not use the "nuclear weapon" of government regulation to control. The giant Ponzi scheme of casino capitalism on Wall Street should be allowed to continue unabated because the über-rich profit from it while everyone else suffers.