“If you didn’t pay your mortgage, you shouldn’t be in your house. Period. People are getting upset about something that’s just procedural.” said Walter Todd, portfolio manager at Greenwood Capital Associates. [...]

“Everyone’s responsible for following the law. If we all don’t have to pay our mortgage, should we just stop paying taxes, too?” said Anton Schutz, president of Mendon Capital Advisers. “Your mortgage didn’t get to a robo-signer by accident, it’s because you’re not paying.”

John Carney has a smart and more nuanced post on the topic as well, here. I actually don’t disagree with these points. But I would also note that servicers have in many cases resisted helping homeowners in foreclosure with principal write-downs, modifications or other solutions. The system did not work to keep families in homes. It worked to process foreclosures as fast as possible.

To get a sense of how that happened, I spoke with April Charney, a lawyer at Jacksonville Area Legal Aid, a non-profit clinic that helps low-income Floridians. The interview is lightly edited for clarity.

TWI: Some, including J.P. Morgan Chase chief executive Jamie Dimon, are arguing that this is a paperwork problem, and the homeowners undergoing foreclosure were in default.

April Charney: There is a contract that Fannie and Freddie applies to all its home loans, a customer service, of sorts, that you pay for in your mortgage. It is hundreds of pages online and it’s called the “single-family loan servicing guideline.” There’s a section just for default loan servicing — for servicing loans when the homeowner is in default — and it lays out requirements of the servicers. Any servicer of a Fannie- or Freddie-backed loan, when a borrower goes into default, the servicer has to give the borrower this very special customer service to try to avoid the foreclosure.

It never happens. The servicers just push the loans into foreclosure. They’re missing that entire legal step. We have a complete and utter failure of default loan servicing — a contractually required step in the process that’s there to help homeowners in default. It is preexisting, far preexisting this crisis. And it’s in every contract, and every servicing agreement. The servicer is supposed to be bound to those best practices.

So I’m sick of hearing — they’re in default! They’re not paying their mortgage! They’re delinquent! The servicers have whole books of rules about what they’re supposed to do to aid the homeowner in that case. And they haven’t done any of it.

TWI: Are these guidelines, or are they actually obligated to do it?

AC: No, it’s a breach of contract. And it’s also in the pooling and servicing agreements [for mortgages that have been sold to investors, rather than being held by the mortgage-originating bank]. That’s a breach of contract, as far as the servicers and the investors are concerned.

TWI: And what were the lenders doing, rather than servicing the loans properly?

AC: The servicers were moving homeowners into foreclosure as quickly as possible. Basically, they were paid up to twice as much to finish the foreclosure. And their agreements [with investors] required them to do it within four months of default. Plus, they weren’t staffed up, they weren’t careful, they had absolutely no intention of providing the proper services to the homeowners. They were rubbing their hands, and licking their lips, and foreclosing as fast as possible, and getting paid.

Look, they agreed to service the loans! And there were regulations in place to keep families in their houses. You show me a family that goes through 30 years on a loan without a problem, and I’ll show you somebody who walks on water!

TWI: And what should they have been doing to keep families in their homes?

AC: There’s an entire process — it’s almost like an out-of-court bankruptcy plan, when you work through the guidelines. You can modify the loan, you can change the payment schedule. There’s all sorts of alternatives.

TWI: And so it’s unfair to push homeowners into foreclosure, then blame them for the foreclosure crisis?

AC: There was such a demand for securitized mortgage products, these loans were artificially appraised — appraised for much more than the homeowners could afford or the houses were worth. So, they’re liar loans in more than one sense. We have no appraisal system that’s functioning in this country. We have no title insurance system that’s functioning in this country. And we have no lending system that is functioning in this country. So we should probably stop the foreclosure system, that’s functioning too well, until we have that sorted out.

And I’ll note, these problems aren’t just in residential mortgage loans. These problems are in commercial loans, and credit cards, and student loans, and all sorts of other kinds of debt. There are a lot of shoes that are going to drop.

Normally, these mortgage notes are not a problem — they’re legally filed with the lender and the borrower, along with all of the other mortgage paperwork. Enter the securitization process, wherein investment banks buy up lots of mortgages from lending banks, bundle them into mortgage-backed securities and sell them to investors. All of a sudden, those notes are missing. A lot of them. And that clouds who owes what to whom, and who has the right to foreclose.

Instead of doing the proper paper shuffling with hundreds of thousands of mortgage notes, investment banks created an online system called MERS, the Mortgage Electronic Registration System, to keep track of the mortgage documentation. The problem is that MERS does not have the same legal standing as all those bits of paper. Banks that lost track of notes and were relying on MERS to ascertain their right to foreclosure are in the wrong, in the eyes of the law.

“Let’s say I borrow $100,000 from you to buy a house,” Janet Tavakoli, the president of Tavakoli Structured Finance, Inc., explained to me yesterday. “You’re my private banker. You’re smarter than most bankers, so you insist that we record everything properly, showing that you have a lien against my house. This is basic banking. It’s not rocket science. It’s tedious, but you’re a banker and that’s what you get paid for.

“Now, let’s say that you never properly recorded our loan and your right to my property, but you still try to show up in court to try and foreclose on my home, if I stop paying you. The judge is going to tell you that you can’t foreclose. I might owe you money — that’s not in dispute. But you can’t just come take my house.”

She continues: “The banks are basically saying: We had sex, that means we’re married! That doesn’t stand up in court. They didn’t get the paperwork correct, which they were obliged to do, and they sloppily sold it to other banks and investors.”

Following mortgage notes is tedious. It is confusing. But it is important. And this week, a coalition of unions and housing advocates, led by the SEIU, launched a campaign to help regular homeowners find their mortgage notes — and to figure out who really holds the right to their mortgage payments.

At the site www.wheresthenote.com, homeowners give their name and address, and identify their lender. The site then spits out a form letter requesting information about their mortgage note. Thus far, a number of folks have apparently gotten responses back. More on that later.

But the outlook looks grim for the bank — and especially when it comes to mortgages. This afternoon, about 40 state attorneys general are set to announce a joint investigation into widespread foreclosure fraud. Some analysts argue that the scandal could engulf every mortgage securitized — that is, bundled and sold to investors — in the last seven years. All in all, the crisis could cost banks tens of billions.

And J.P. Morgan’s statement reveals it is battening down the hatches. The company said it has set aside an extra $1.3 billion for possible legal costs. It also said it is carefully reviewing 115,000 mortgage affidavits in an earnings call. (CEO Jamie Dimon tried to reassure call participants by saying there is “almost no chance we made a mistake” with foreclosures.) And it revealed that it increased its mortgage-repurchase reserves by $1 billion. The bank uses that money, now more than $3 billion, to buy back bad mortgages it packaged and sold to investors or the government-sponsored entities, Fannie Mae and Freddie Mac. (Often, the investor makes the bank buy the mortgage back because the documents are faulty.)

That implies J.P. Morgan alone is preparing for a multi-billion-dollar fallout. Watch for other banks to do the same when they reveal their third-quarter earnings, this week and next.

Only 23 states require a judge to sign off on a foreclosure, but some banks are now stopping foreclosures in all 50 states. Moreover, they are halting the sale of foreclosed properties to new homeowners.

So who stands to gain? And who stands to lose? Let’s go through the possible impacts on major players and markets, one by one.

The winners:

• Homeowners undergoing foreclosure. Borrowers undergoing foreclosure might benefit from the various state moratoriums: The process is stalled for now, meaning some might have a few more months in their homes, and they know they will not be evicted without due process. States and federal agencies might also work with banks to provide principal write-downs and right-to-rent to ameliorate the foreclosure crisis in the meantime.

The losers:

• Recent purchasers of foreclosed homes. A nightmare scenario: Banks probably foreclosed on and evicted families without proper mortgage documentation. It is unclear whether or how courts might overturn those foreclosures. (One expert I spoke with said it would be more likely that the bank would have to offer some sort of restitution to the evicted family, but nobody really knows.) What if you recently bought one of those houses? There’s a whole lot of uncertainty for you, right now.
• The housing market. The fraud crisis looks certain to prolong the foreclosure crisis — dragging out how long families undergoing foreclosure will remain in limbo, and preventing banks from clearing properties off of their books. It seems possible that the foreclosure fraud crisis will weaken an already-weak housing market.
• The banks and investors. This could be a complete catastrophe. For a detailed but clear explanation of the various liabilities, see Mike Konczal’s description of who owns what and who stands to lose — and an explanation of why this might create a new too-big-to-fail scenario. Rep. Brad Miller (D-N.C.) also provided a clear explanation to The Washington Post yesterday:
  

  There is massive potential liability for the securitizers, which are mostly the biggest banks. The contract was that if mortgages didn’t meet certain requirements, then the securitizer would buy them back. The mortgage servicers and trustees have exclusive control over the paperwork. Both the investors, the people who own the mortgage-backed securities, and the homeowners, really depend on them. There’s been lots of litigation where investors try to get securitizers to buy back the bad mortgages because they were flawed, but that litigation has been stymied by procedural objections. If the private investors can break through that defense and require the mortgages that don’t meet the requirements to be bought back, the liabilities for the biggest banks will be enormous.

A little of each:

• Communities with concentrations of homes in foreclosure. Good news and bad news. On the one hand, families should be able to stay in their homes until the banks and Washington work out the foreclosure fraud crisis. That will benefit communities with lots of families undergoing foreclosure. On the other hand, neighborhoods with high concentrations of bank-owned properties for sale will see a lot of homes remain vacant, pulled off of the market.
• The courts. State attorney generals — Beau Biden in Delaware, Richard Cordray in Ohio, Tom Miller in Iowa and many others — are going hard after the banks. This looks to be just the first wave of what might be thousands of cases for judges to handle. Many housing advocates argue that judges should have had a more prominent role in foreclosure decisions before, anyway — and this might give new life to cramdown legislation in Washington. But the scandal certainly has the potential to swamp courts and cost billions in legal fees. In that sense, lawyers might be the clearest winner from the whole thing thus far.

I write to request that your mortgage-servicing division suspend foreclosures on Nevada home owners until systems are in place to ensure Nevadans are not being improperly directed into foreclosure proceedings.  I also renew my request that your firm meaningfully participate in the Nevada Housing Division’s Hardest Hit Fund (HHF) program by matching in kind any mortgage-principal reductions provided by our state agency.

Recent reports that some mortgage servicers have made misrepresentations in foreclosure-related court documents revealed they are cutting corners in their efforts to process the large volume of delinquent home owners. Some servicers have rightfully suspended foreclosures in those states that have judicial-foreclosure proceedings until they complete a review of their processes to ensure affidavits and other court documents meet the appropriate standards.

While Nevada is not among those states, suspending foreclosures on Nevadans is also justified because the reports of shoddy and defective affidavit preparation suggest that servicers might not be reviewing a home owner’s loan documents with the requisite care.  To be sure, a closer review of these documents could lead a servicer to initiate a foreclosure in many cases.  But I’m concerned about those cases where carefully analyzing a home owner’s income and debt would lead to the conclusion that a modification is the best solution.  These are the cases where adjusting the terms or reducing principal of the mortgage would result in the net present value of the loan being greater to the lender than it would recover through foreclosure.

It is only fair to Nevada home owners, consequently, that you also suspend foreclosures in our state until you complete a review of your processes that ensures a home owner’s loan documents are being adequately analyzed to properly determine the best, individualized loss-mitigation solution.  It is my belief and hope that once such a system is in place, more Nevadans will avoid foreclosure and remain in their homes.  This is the goal of the Obama Administration’s various Making Home Affordable programs, and should be the goal of a servicer acting as a fiduciary to investors.

Additionally, since months have now passed since I last made the request, and the Treasury Department has now approved Nevada’s and the other HHF states’ foreclosure-prevention programs, I ask again that you consider matching the dollars contributed by the Nevada Housing Division through these programs.  The Housing Division has designed both a principal-reduction and a second-mortgage-reduction plan that will only be successful with your commitment to do so.  Indeed, many of Nevada’s local community banks have made this pledge.  The similarities between the various state HHF plans should streamline your participation and provide the scale necessary to significantly reduce foreclosures in all of the hardest-hit states, quickening a recovery in these struggling housing markets.

I appreciate your consideration of these requests, and I look forward to your response.

Sincerely,

Harry Reid

U.S. Senator, Nevada

Three of the biggest mortgage servicers — Ally Financial, J.P. Morgan Chase  and Bank of America — have halted foreclosure-related evictions and in some cases other proceedings in the 23 states that require a judge to OK a foreclosure.

Nevada is the state worst-hit by the unemployment and foreclosure crises. There, nearly 70 percent of homeowners are underwater or nearly underwater on their homes.

“Fine print obscures the cost of credit and makes it impossible for families to compare products. Too often, families come to understand the legalese only when they get bitten by it,” Warren said. ”Streamlined disclosure can level the playing field and give families better tools to make better choices. This is particularly true in the mortgage market, where borrowers receive stacks of incomprehensible paperwork when they’re looking for a loan.”

Under Warren, the CFPB will combine and clarify two overlapping laws — the Truth in Lending Act (TILA) of 1968 and the Real Estate Settlement Procedures Act (RESPA) of 1974 — so that loan applicants get just one document of easy-to-understand fine print from lenders. It’s a small-bore change in laws, but one that could have a huge impact on consumers — just what progressive activists wanted Warren in place to ensure and enforce.

Last month, housing slumped to its worst state in decades. The National Association of Realtors said home sales declined 27 percent to a 15-year low. And the Commerce Department said sales of new single-family houses dropped 12.4 percent between June and July, to the lowest level in the 47 years the department has kept the data. Foreclosures remain high. And many economists predict a second national decline in home prices.

Reviving the Obama tax credits might halt or slow that second leg down, and it might be worth doing for that reason. But some data indicates the credits merely convinced people who were going to buy houses anyway to buy sooner, rather than bringing in new juice. And mortgage reduction seems a better way to keep families in homes and stabilize housing.

It noted: “Although Treasury’s funds under the senior preferred stock purchase agreement permit the company to remain solvent and avoid receivership, the resulting dividend payments are substantial and the company does not expect to earn profits in excess of its annual dividend obligation to Treasury for the indefinite future.”

Today, its twin, Freddie Mac, announced that it lost $4.71 billion in the second quarter, and it asked Treasury for $1.8 billion to remain solvent. It too said it does not foresee any return to profitability.

So how did Freddie Mac end up losing so much more than Fannie Mae? The two have the same mission, but keep separate books. This quarter, Freddie lost $3.8 billion on derivatives, where it had made $2.4 billion on derivatives the same quarter a year ago. It also made $5 billion in credit losses. Still, the organization performed better in the second quarter than the first, where it lost $6.7 billion.

The total bailout for the two will now top $150 billion. Fannie Mae and Freddie Mac, which stabilize and provide liquidity to the housing market by buying up mortgages from lending banks, have a blank check from the government.

Last week, rumors abounded that the Obama administration, realizing Congress will likely enact no more stimulus, might force Fannie and Freddie to write down the value of mortgages — essentially bailing out underwater homeowners. Since, the Treasury Department has quashed the rumor.

In Wisconsin and other states, home buyers might be eligible for 100 percent financing on mortgages. (Creative Commons.)

“Buy new with $1,000 down,” the advertisement says, the words resting atop a trim green clapboard house offset by a bright blue sky. “The time has come. Stop wasting rent check after rent check and start building equity in your own home. And with only $1,000 down, affordable monthly payments and no private mortgage insurance required, the dream is closer than you think.”

[Economy1] It sounds too good to be true. But it is true. This offer does not come from a subprime lender, looking to reel in thousands of unqualified and ill-advised homebuyers, only to slap them with add-ons, fees and variable rates. It is not a teaser or a trick. The advertisement references a program initiated by the National Council of State Housing Agencies and Fannie Mae, the taxpayer-backed, government-sponsored enterprise that buys up mortgages from lending banks.

The pilot program is called “Affordable Advantage,” and it has now been adopted by three states — Massachusetts, Wisconsin and Idaho. (Other states, such as Pennsylvania, California and Colorado, have similar state programs.) The initiative is small, reaching just a few hundred people so far. But it is looking to expand. Given the dangers of these types of mortgages and the specter of the housing bubble, where unconventional loans wreaked disaster, it is also raising questions from wary housing experts and legislators.

Fannie Mae helped to create Affordable Advantage after the state government agencies tasked with expanding homeownership found they were having trouble doing their job. Before the recession hit, these housing finance agencies, known as HFAs, issued tax-free bonds and used the funds on programs to encourage developers to build in underserved areas and to support single-family mortgages. When the financial crisis hit, private companies — leery of the collapsing housing bubble and freezing mortgage market — no longer wanted to buy the HFAs’ bonds. Their business ground to a halt.

To help HFAs move forward, Fannie Mae and NCSHA stepped in. Fannie Mae agreed to purchase mortgages with tiny down payments, as long as the homebuyers were vetted — had excellent employment histories and credit, and merely lacked a cash reserve for a down payment. And the participating HFAs agreed to buy back loans if they became delinquent, in lieu of Fannie asking for more-traditional mortgage insurance.

“[The program] was created to support state HFAs and their efforts to provide qualified first-time homebuyers with financing in the wake of the housing and economic downturn,” Janis Smith, a Fannie Mae spokesperson, says. “HFAs are nationally regarded leaders in affordable housing finance and their business is prudent, sustainable business. HFAs work closely with their borrowers to ensure they’re well prepared for homeownership. As a result, the loans delivered by HFAs have very low delinquency rates. In addition, HFAs work with first-time homebuyers who need and are qualified for affordable housing — a segment that has seen increased demand with the downturn in the housing market.”

Now, qualified homebuyers in the three states pioneering Affordable Advantage do not need to put down the 3.5 percent minimum down payment required by the Federal Housing Administration, or much of a down payment at all. They can get 100 percent financing — a loan as big as the purchase price of the house — for a 30-year, fixed-rate mortgage — a vanilla mortgage. The deal includes a program to help homebuyers if they become unemployed, lowered fees and there is no requirement that the homebuyer purchase mortgage insurance.

Wisconsin started the program first, in March, offering 100 percent loan-to-value mortgages for borrowers with a minimum credit score of 680. “It’s a good credit score,” explains Kate Venne, the spokesperson for the Wisconsin HFA. “In addition, we want to see what other lines of credit people have, and their performance. We look at their work history. We call their employers.” Thus far, Wisconsin’s HFA has offered $52 million in mortgages to 450 buyers.

But there are concerns and problems intrinsic to purchasing a home with almost no money down. First and foremost, if the housing market turns down even a fractional amount, the homeowner will go “underwater” immediately. If the price of the house falls by even a bit, he will owe more on the mortgage than the house is worth. If he needs to sell it, he needs to come up with extra cash to pay the bank back. And the fact that the homeowner only had a thousand dollars to put down in the first place implies that he does not have much financial breathing room and might default.

“That is clearly a worry,” says Barry Zigas, the director of housing policy for the Consumer Federation of America. “But for people who are buying a home first and foremost as a place to live, the fact there might not be much equity, or the equity might go negative — that’s not the most important feature.”

He argues that vetted low-income buyers have excellent track records in terms of default, as long as they are invested in their communities and have good employment and credit histories, if not savings. “The more equity you bring to your transaction, the more security you bring. But this can be a great way for people to gain access to homeownership who might not have been able to otherwise. And with mortgage rates what they are” — at historical lows — “this program lets those specific people gain mortgages.”

Others disagree. “Haven’t they noticed what’s happened to the country in the past five years?” asks Dean Baker, the co-director of the Center for Economic and Policy Research. “You’re not necessarily helping if you’re helping them buy a home where they’re in the position they won’t be able to afford it. I don’t understand the logic of this. House prices are still going to fall. And when they do, we haven’t helped these people who are going to have to work like crazy to pay their mortgage off, or they’re going to default. If you’re in a situation where this is the only mortgage you can get, you shouldn’t be buying a house.”

And many of the governments’ own economists believe that houses should not be many Americans’ primary investment. Karen Pence, who leads the Federal Reserve’s real estate finance research group, argues that homes are a terrible investment and believes the government should offer fewer programs and incentives to subsidize homeownership.

On top of that, Affordable Advantage raises questions since, at the end of the day, taxpayers are backing its investments — Fannie Mae being under the government’s conservatorship, and Treasury being the main purchaser of bonds from the state HFAs. In recent months, the government has turned away strongly from programs helping encourage mortgages with low down payments.

The Federal Housing Administration, for instance, considered a plan to let homebuyers use the Obama administration’s $8,500 first-time homebuyer tax credit to cover the 3.5 percent minimum required down payment. It received such push-back from the Hill, incensed the federal government would pay homeowners to have no skin in the game, and from housing experts, that the Department of Housing and Urban Development pulled the program. Indeed, faced with a 14 percent delinquency rate, the Federal Housing Administration increased the premiums it charges to insure some mortgages this year. And it set down payment requirements at 10 percent for borrowers with low credit scores.

On the Hill, increasing numbers of legislators want to ban mortgages with low down payments outright. Rep. Scott Garrett (R-N.J.) last year introduced legislation requiring FHA borrowers to put down 5 percent at least. This spring, Sen. Bob Corker (R-Tenn.) requested an amendment to the financial regulatory reform bill requiring minimum 5 percent down payments for private mortgages. Multiple legislators from both sides of the aisle have recommended looking at down-payment reform for Fannie and Freddie.

Low-income housing advocates argue that the state programs have much lower default rates than the national average, because the state HFAs had good track records of checking out prospective candidates and offering loans only to good ones. Kate Venne, of the Wisconsin HFA, says its default rate is just 1.83 percent. But more and more believe that the products are simply too dangerous, and that the government should no longer boost homeownership for Americans without the means to put at least 3.5 percent down.

“In today’s world, without question, we’ve learned two lessons,” FHA Commissioner David Stevens told reporters this winter. “One: homeownership is important to the sustainability of communities. And two: not everybody should own a home.”

Correction: A prior version of this article misstated the name of the Federal Housing Administration, as the Federal Housing Agency. TWI regrets the error.

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.