Strategic Defaulters as the New Welfare Queens (NakedCapitalism)

[adamuu]

The full article is here. http://www.nakedcapitalism.com/2010/07/strategic-defaulters-as-the-new-welfare-queens.html Here are some excerpts.

(T)he agencies and regulators are simply taking the word of Bank of America and Citigroup that people are strategic defaulters rather than the victims of predatory loans or abusive service.

But what was shocking was the extreme anger they showed. These are bureaucrats, so I expected a kind of boring process-talk. Not so. The guy in charge frequently dropped in lines like, 'back when people used to actually PAY their mortgages and follow through on their promises.'

1. The strategic default “trend” is almost without a doubt wildly exaggerated
...
2. There isn’t any clean neat way to determine if someone has made a strategic default.
...
3. Fannie, Freddie, and their friends and allies in DC labor under the delusion that the push that the GSEs have announced to pursue deficiency judgments ... is something new.
...
4. To the extent the authorities try anything new ..., their misguided targeting is almost certain to backfire. People do not trust their servicers. Why call them if something has changed or you have come to the conclusion that eventual default is inevitable? Moreover, many borrowers might be loath to try to work out a deal because the media has reported numerous cases where borrowers complied with servicer instructions, made higher payments to get a temporary mod, and failed to get a permanent mod, with the net result that their cash was even more depleted had they defaulted when they had determined they could no longer afford their mortgage. Moreover as the DC expert noted, servicers are often very hard to reach. So contact with the servicer is a ridiculous proxy for borrower intent and condition.

So why all this hysteria about strategic defaulters? If I were conspiracy-minded, I’d say this is a very clever push to stoke jealousy among what is left of the middle class to keep the focus off the way the banksters wrecked the economy, got lots of cash and prizes, and have every reason to repeat that profitable exercise. So focus public ire instead about the commies in our midst, um, the new welfare queens, aka various forms of alleged housing deadbeats. The immediate reason is that the more people are made to resent the breaks they fantasize their neighbors are getting, the more they will oppose deep principal mods, which historically is what banks always did when they had a borrower get in trouble who still had a remotely viable income.

This push could also be an effort by the GSEs to shift blame, Whocouldanode 2.0: “whocouldanode prime borrowers would default at such high rates?” It wasn’t our crappy procedures and unduly optimistic assumptions, it was the black swan of a change in values!

And most important, what happens if the public comes to understand the hypocrisy of the banks’ stance, that they are demonizing borrowers for failing to live up to contracts, when they couldn’t be bothered to comply with the terms of their own contracts, which set up procedures for conveying notes to the securitization entity, and in many cases foreclosure mills have forged documents to cover up that fact? Whoever is behind the “strategic defaulter” push may well wind up hoist on his own petard.

[burnsei sensei]

1. The rich affecting the guise of poverty

because they envy the poor.
They deserve nothing but indifference.
When we get a truly wise set of leaders, they'll get it.

[leveymg]

2. 'Walked away from the mortage" is an industry meme - a very effective one that makes forceclosure

seem like normal business behavior. It isn't. In the vast majority of cases, it's a devastating emotional and financial loss that destroys and dislocates families, leading to homelessness.

It's shocking to see how often even DUers repeat the meme.

[adamuu]

3. Interesting. Are you saying, in general?

I don't see that phrase in this article.

[leveymg]

5. Yes. The "walk away" meme first emerged about the time of Obama's election, the strategic default

meme is a more recent follow-up that reinforces the original. The desired effect is that when people see a "Foreclosure" sign, they no longer think of dislocated families - they envision some greedy investor who walked away from a strategic investment.

That's how advertising, PR and political messaging works - to shift the frame of reference. This, unfortunately, is a particularly successful example.

[jberryhill]

8. It doesn't matter either way

Even if they were strategic investors, I don't see the problem.

A contract says:

You do X and Y happens.

You don't to X and Z happens.

Choosing to do X or not to do X is merely choosing result Y or result Z.

Both parties agreed to this thing, and the bank, after all, WROTE the thing. Nobody agreed to put on a set of handcuffs, and both parties were free to take the deal or not.

[leveymg]

9. Fortunately, public policy isn't just symbolic logic, or else we would all have been replaced

by computers by now.

Unconscionable contracts. Compassion. Assistance to those who have fallen into distress. All alien concepts to some.

[jberryhill]

10. My point is that there is no reason to cast moral aspersions on defaulters /nt

[midnight]

4. I can't understand if the banks were bailed out, why are they

asking people to pay on debt that was already payed off?

[adamuu]

12. because they took that mortgage and leveraged it times 30

now, when one person defaults, it's as if there were 30.

[lunatica]

6. We're at fault because we failed to read the -10 point font in the fine print

It says right there that the banks reserve the right to change the rules at will, but that we are obligated to pay up no matter what the new rules are. Jesus! Just read the fine print people! :sarcasm:

[jberryhill]

7. People are really funny about contracts

Look, the mortgage contracts say, "If you pay, here is what happens. If you don't pay, here is what happens."

This notion of defaulters "failing to live up to contracts" strikes me as misplaced.

A proper contract doesn't morally obligate one to some kind of performance - it merely specifies what will happen in the event of performance, and what will happen in the event of non-performance.

There should be no complaining about it. If mortgage borrowers are defaulting, then the contract spells out what action the bank should take. If the bank doesn't want to take the specified action, then whose problem is that? They wrote it, they can follow it.

Choosing one set of outcomes over another set of outcomes under a contract is merely an economic choice.

[adamuu]

11. Hopefully the stigma factor is another miscalculation

on the part of the banks. After all, the banks were bailed out