House Bill Penalizes Strategic Defaulters
Last week, I noted that House Republicans had introduced a motion to penalize strategic defaulters — underwater homeowners who simply stop paying their mortgages and surrender their homes to the bank — by barring them from obtaining Federal Housing Administration-backed loans in the future. I hadn’t noticed until now, but the House ended up passing its FHA Reform Act with the penalization for strategic defaulters in the bill. (The act now needs Senate approval before it becomes law.) Rep. Chris Lee (R-N.Y.) got the provision in there on an unopposed unanimous consent motion.
Rep. Barney Frank (D-Mass.) supported the strategic-defaulter provision, if crankily: “I am going to urge people to vote for it. I will say that it might need a word or two of improvement. If it had, in fact, been offered at the Financial Services Committee, either provision, we could have accepted it then, but then members wouldn’t have had a chance to make dramatic speeches on the floor, so I suppose that explains why we had to go through this.”
Here is Lee on the motion:
According to a study by Experian and management consulting firm Oliver Wyman, from 2007 to 2008, the number of strategic defaults more than doubled to 588,000, and a separate 2009 survey found that more than a quarter of all existing defaults were strategic.
Meanwhile, there are lawyers, scam artists and opportunists touting the financial benefits of walking away from a mortgage and offering to help you do that for a fee. Not a day goes by that we don’t read another news article about folks who are making calculated decisions to stop paying their mortgages even though they still have the ability to pay. We are not talking about those families who have fallen on hard times or who simply can no longer afford to make their payments. We are talking about this new trend of people who voluntarily choose to stop paying their mortgages even though they still have the ability to pay.
While these decisions should ultimately be left to the individual, we should put in place more stringent penalties to discourage this irresponsible behavior. If borrowers make decisions to strategically default on their loans, they certainly should not be allowed to benefit from a government-subsidized program.
This motion makes it clear: if you can afford to pay your mortgage and choose not to, you will no longer be eligible to secure an FHA mortgage. This motion calls on the Secretary of HUD to define strategic default and to work with lenders to identify and to prevent borrowers from participating in the FHA program.
The language prohibits the FHA from “newly [insuring] any mortgage under this title that is secured by a 1- to 4-family dwelling unless the mortgagee has determined, in accordance with such standards and requirements established by the Secretary, that the mortgagor under such mortgage has not previously engaged in any strategic default with respect to any residential mortgage loan.” It says that the FHA needs to figure out what an “intentional default” is in the first place.
Here is what I wrote on this topic last week:
[Republicans argue] 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?
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.
I repeat the point. There are better ways to deal with this problem than to have the FHA attempt to identify and punish strategic defaulters, particularly if Congress does nothing to ameliorate the underlying issue of homeowners being underwater on their mortgages.