A Nation of Moochers (23 page)

What happens, though, if the moral stigma is removed? What happens if financial responsibility is decoupled from notions of “good character”? Such a transformation means that a promise to pay a debt becomes, instead, a dare: Lend me money and I will repay if it is convenient to me.

The advocates of walking away from your mortgage would respond that this does not account for the provision of collateral: The homeowner promises to pay the mortgage
or surrender the property to the bank.
But the point of strategic default is to choose to not pay back the amount borrowed (plus interest). The moral and financial reluctance to renege on such loans is not much different from the moral objection to refusing to pay other debts, which might also be inconvenient. During a recession, for instance, heavy credit card debt can also be an annoying drain on cash flow even for borrowers with sufficient income to pay such debt. Since those credit card balances are largely unsecured, such debt is by definition always “underwater.” The same applies to many auto loans, which may exceed the book value of the car, truck, or van they helped to purchase. Why wouldn’t the same amoral logic apply to strategic defaults on all of these promissory notes, especially since we are supposed to be getting past this whole idea of “promises”?

Unfortunately, moral arguments alone will not determine the direction that American culture and finance takes in the next few decades. Applying the “sucker principle” to the mortgage issue, homeowners will react to how government and their neighbors behave. If playing by the rules and paying one’s mortgage out of a sense of moral obligation comes to seem like a sucker’s game, if government subsidizes deadbeats and defaulting becomes both common and socially acceptable (or at least not objectionable), the culture of responsibility will have reached a tipping point.

Chapter 13

NO, THEY DIDN’T LEARN ANYTHING

By and large the mortgage bailout effort has failed, perhaps reflecting the inherent difficulties in trying to turn the unaffordable into the affordable simply by government fiat or intervention. Nearly 60 percent of the delinquent mortgages that were modified by banks were in default again within the first year.
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As it turns out, not surprisingly, reckless deals can seldom be transformed into viable ones, even by acts of Congress. It was not, however, for lack of trying and tens of billions of dollars of taxpayer money.

In February 2009, President Obama declared that his $75 billion Home Affordable Modification Program (HAMP) would “enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure.”
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The idea was to provide an incentive for lenders to modify troubled mortgages. Within the program’s first year, 40 percent of the 1.5 million people who tried HAMP were booted from the program altogether, and the whole process became known colloquially as “extend and pretend.” Rather than saving homes from foreclosure, the program only delayed the inevitable. As two financial writers for
The Huffington Post
explained, by “extending the process by which homes enter foreclosure” banks were allowed to carry the loans on their books at full value, which “allows unhealthy banks to appear healthy, staving off costly bank failures.” Or, in other words, pretend to be solvent.

But there comes a day when all fairy tales and attempts at financial self-deception come to an end. Or at least you’d think so.

No Down Payment, No Income

Even as the economy was trying to crawl back from the subprime lending meltdown, the taxpayer-funded Wisconsin Housing and Economic Development Authority ran radio ads touting no-money-down mortgages:

WHEDA … We do … So you can buy your first house with no money down! Coming up with a down payment prevents a lot of renters from becoming homeowners.…”

What if you also have no income? Not to worry. There was a bailout for that, too. WHEDA promised that the taxpayers would even pay your mortgage for six months if you lose your job. At first, the new loan program known as Affordable Advantage was offered in just three states: Massachusetts, Minnesota, and Wisconsin. Because the states unloaded the mortgages to Fannie Mae,
The New York Times
noted, “taxpayers are on the hook if the loans go bad.”
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That includes loans in which homeowners paid as little as 67 cents down. One of the early borrowers under the Wisconsin program was a couple named Matthew and Hannah Middlebrooke, who bought a $115,000 three-bedroom ranch house with a down payment of just $1,000. But because the couple also got a grant to cover closing costs and insurance, they ended up at the closing writing out a check for just 67 cents.

Commenting on the return of the government-sponsored virtually-no-down-payment loans, CNBC’s Diana Olick noted that the program “seems contradictory in its fundamental premise. The buyers in the Affordable Advantage program have no skin in the game from the start, and no guarantee that the home won’t lose value over the next year.”
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One of the directors of the Government Accountability Office reminded
The New York Times
that “loans that have zero down payment perform worse than loans with down payments.… And loans with down payment assistance”—like those being marketed by the housing agencies–“perform worse than those that do not.”
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Isn’t this how we got into this mess in the first place?

TARPing the (Upper) Middle Class

In March 2010, the Treasury Department announced yet another attempt to beef up its bailout program by throwing even more cash at it. The Treasury hoped that with a taxpayer subsidy, some lenders might provide mortgage relief for homeowners who were underwater on their mortgages. One provision required mortgage providers to write off a portion of mortgage loans to get them down to “a manageable level.” As
The New York Times
reported, “To lubricate its efforts, the government plans to spread taxpayers’ money around liberally.”
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Who was eligible for this latest round of taxpayer generosity? The Treasury Department explained that you could tap the HAMP if you:

live in an owner occupied principal residence,
have a mortgage balance of less than $729,750,
owe monthly mortgage payments that are not affordable (greater than 31 percent of their income) and demonstrate a financial hardship. The new flexibilities for the modification initiative announced today continue to target this group of homeowners.
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(Emphasis added.)

Pause here, and then reread that.

Economist Keith Hennessey was flabbergasted. Even by the ever-eroding standards of the bailout tsunami, this was stunning. Under the government’s plan, calculated Hennessey, homeowners with annual incomes of up to $186,000 a year would be eligible for the assistance. The price tag: $50 billion.

Asked Hennessey: “Does it really make sense for the Administration to use taxpayer funds to subsidize someone making less than $186,000 per year to stay in a home with a $700,000 mortgage balance?!”
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“This isn’t even a middle-class entitlement,” commented finance writer Lawrence Kudlow, “it’s an upper-middle-class entitlement.”
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Hennessey challenged the premise behind bailing out “underwater” homeowners. Many of those homeowners had, of course, suffered traumatic losses in the value of their homes, but if they had fixed-rate mortgages, their actual out-of-pocket costs wouldn’t be affected. The homeowner could stay in the house and wait for the price to edge back up, just as an investor might hold on to an undervalued stock.

Why, then, Hennessey asked, should the taxpayers subsidize a homeowner who has lost money on a real-estate investment any more than taxpayers should subsidize someone who lost money on a bad stock bet? “Why do policymakers (on both sides of the aisle) think we should make taxpayers (some of whom struggle to make their own mortgage payments, and others of whom rent housing) subsidize someone who lost money on an investment?”

He suggests this scenario: “Two twin brothers each make $180,000 a year. One rents, and the other has a $700,000 mortgage on a home that declined from $800,000 in value to $600,000 in value. Both brothers lose their jobs. Why should the renter pay higher taxes to subsidize his brother’s mortgage payments?”

Hennessey offered this kicker: Imagine a third brother (who also rents) and who loses $200,000 in the stock market, “and explain how your policy applies to him.”
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