House Republicans Target Strategic Defaulters

HuffPo’s Ryan Grim reports that House Republicans have introduced a motion to penalize strategic defaulters — underwater homeowners who simply stop paying their mortgages — by barring them from obtaining Federal Housing Administration-backed loans in the future. Grim explains the Republican maneuver:

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.

In a letter regarding the motion to recommit, a staffer in Minority Whip Eric Cantor’s (R-Va.) office says that strategic defaulters are stopping paying their mortgages, staying in their homes and using the money to buy trips to Disneyland and cruises. The tone is vituperative.

Of course, there is a kernel of truth there. Yes, some people are giving up on their mortgages and using the money to go on vacation. But, by and large, people who stop paying their mortgages — taking on the risk that they will at some point be evicted, and knowing it will ruin their credit scores — are economically distressed. The ones Republicans are complaining about are buying SUVs. Most are buying things like groceries.

Moreover, the Republican letter seems to imply that strategic default needs to be legislated away, and its perpetrators punished. But strategic defaulters are not committing some felony or crime. They are not even really breaching their contracts. Every mortgage contract spells out what happens if the homeowner does not pay: The bank evicts them and takes the home.

Furthermore, the Republican letter does not spell out how the government would designate someone as a strategic defaulter anyway. Strategic defaulters are people who could continue to pay their mortgages but choose not to. Defaulters are people who cannot continue to pay their mortgages. But does the government really want to stipulate that homeowners have to hand over, say, up to their last $2,000 of savings to the bank before they can walk away from their home? Up to their last five percent of annual income? What if those people need the money to move, or to pay medical bills, or to buy shoes for their kids? Since when have Republicans advocated telling Americans how they can and cannot spend their money?

Plus, does the Republican Party really want to prevent strategic defaulters, who now number in the hundreds of thousands, from accessing fair, reasonably priced mortgages in this sluggish housing market? The banks, given the credit scores and credit histories they have access to, have plenty of ways to determine whether a prospective borrower is mortgage-worthy. I would leave this up to the private sector.

Finally, the way to tackle this problem is to … lower the number of strategic defaults. The best way to do that is to make sure that the recovery is strong, employment is growing and that homeowners are not underwater. Improving the Home Affordable Modification Program and “cramdown” provisions would go a long way to reducing homeowners’ monthly payments and principal, helping to keep them in their homes.

Here is the full text of the letter, posted by HuffPo:

From: Vieson, Chris

Sent: Thursday, June 10, 2010 10:15 AM

Subject: WHIP LD Alert: Republican Motion to Recommit FHA Reform
The Republican Motion to Recommit H.R. 5072, the FHA Reform Act, would amend the bill to prohibit individuals who strategically default on their mortgage from accessing the FHA program and protect taxpayers from financing a bailout of FHA programs.

Strategic Defaults

A strategic default occurs when a borrower decides to stop paying their mortgage even though they can still afford their payments. It is usually undertaken by those who owe more on their mortgage than their home is currently worth.

The Wall Street Journal has reported on families that have chosen to stop paying their mortgage and instead use the extra money they are saving each month to “buy season tickets to Disneyland…take a Carnival cruise to Mexico…” and go out to dinner more often.

Companies have even sprung up to capitalize on the new trend with websites advising people (for a fee) on how to go about a strategic default. These companies actually advertise that after a few years an individual who chooses to default on their mortgage should be able to buy a home again, including through government loan agencies.

60 Minutes reported on individuals who defend their decision to strategically default saying, “…with the money savings that I will have in four to six years, I’m confident I’ll have money to buy my way into a house if I want to.”

Strategic defaults raise costs for responsible borrowers, many of whom may currently be struggling to make their mortgage payment themselves, but who take their obligations to pay their debts seriously. The MTR would ensure that no one who chooses to simply stop paying their mortgage, even though they can afford to do so, is able to benefit in the future from the government’s FHA program.

Future Bail-Outs

The Republican motion also protects American taxpayers from possible future bailouts of FHA programs. Washington currently has a bailout culture at the expense of hard-working Americans and this MTR puts into place protections against FHA receiving a taxpayer-backed bailout.

The Republican MTR is a vote to expose and prevent fraud and abuse from FHA and protect the American taxpayer from another Washington bailout.