House Targets Underwater Homeowners
The House GOP launched an assault Thursday on homeowners who walk away from underwater mortgages, arguing that such foreclosed-on former homeowners are using the money they save to dine out and go on cruises.
"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," says House Republican leadership in an e-mail to colleagues explaining the anti-strategic-default effort.
In other words, consumers with more money tend to spend it, spurring demand -- exactly what the economy needs. More than a few economists argue that the ongoing jobless crisis is a direct result of a lack of consumer demand. A homeowner stuck in an underwater mortgage is, each month, paying off a mortgage that is worth more than their home. The increased cost of housing means that money that could otherwise could be circulated through the economy - at restaurants, Disneyland, or on cruises, for instance - is sent off to Wall Street, whose profits have been soaring despite the economic downturn.
The GOP offered its provision as a "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.
Mark Zandi, chief economist at Moody's Economy.com and an adviser to John McCain's 2008 presidential campaign, says that strategically defaulting is "a form of stimulus, a little tax cut." Estimates of the number of homeowners are underwater range from 10 to 15 million.
Dean Baker, an economist with the progressive-leaning Center for Economic Policy and Research, agreed that strategic defaults are good for the economy, but also noted the irony that the GOP effort interferes with the market.
When Democrats were pushing to enact "cram down," which would allow judges to rewrite mortgage contracts in bankruptcy court, conservative Democrats and the GOP argued that it would violate the "sanctity of the contract."
There is only sanctity, however, for one side of that contract. "It also disgusts me that the Republicans would use Big Government to interfere with the sanctity of contract," said Baker in an e-mail. "Those who do a strategic default are complying with their contract. The deal was that the banks get back the house if the homeowner doesn't pay the mortgage. Now, the Republicans are arguing that the nanny state has to look out for the little boys and girls at the big banks who are too dumb to understand contracts. They are going to use the power of the government to punish people because they acted on the terms of the contract to the disadvantage of the banks."
Baker said that the GOP position should put to a rest the assumption that liberals favor big government while conservatives favor free markets. He doubted that it would, however.
"It's kind of an overreach by the federal government, isn't it?" teased Rep. George Miller (D-Calif.), chairman of the Education & Labor Committee, when told of the GOP motion. He said he hadn't been aware of the voice vote, but said he was sure it wouldn't become law. The motion, he said, is indicative of GOP priorities.
"They're back to punishing the poor guy that got stuck with the subprime mortgage and we haven't yet figured out what to do with the people who gave them the mortgage," said Miller.
Economist James Galbraith said that in their zeal to protect banks, the GOP may actually have gone further than the banks would like. "The banks are actually tolerating defaults, because they do not wish to recognize the losses. A fair amount of free cash in the system now is there because the banks are deferring foreclosures, which they do because otherwise the losses would affect their profit statements, bonuses and solvency. They have the option of pressing for foreclosures, but they aren't using it in many cases for this reason," he said.
This story has been updated to include the Democratic acceptance of the MTR.
Read the GOP memo on their motion to recommit:
From: [GOP Floor Staff] 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.
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.
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.