Two Items on Foreclosures

The New York Times business section has an interesting article about the limited success of the “Making Home Affordable Program,” which was intended to encourage (but not require!) banks to work with homeowners on facing foreclosure to lower their monthly payments. (The copy of the Times that arrived on my doorstep gave this headline to the article: “In Trial Phase, Mortgage Bills Fall for 500,000.” The online version of the article has the cheerier “Treasury Hails Milestone in Home Loan Modifications.”)

The upshot: half a million families have gotten loan modifications, though they often faced “bureaucratic bungling, ceaseless frustration and confusion.” This is only 40% of the 1.2 million eligible. And some companies have been better than others about modifying the mortgages. Wells Fargo and BoA have only modified 62,989 and 94,918, respectively, which is only 20% and 11% of those companies eligible mortgages, respectively. Bad BoA! Bad WF! (Has anyone heard anything good about these companies lately? Oh yeah, Ken Lewis resigned.) Still, “economists said the program was still not big enough to prevent many millions of Americans from losing their homes before the books are closed on the Great Recession.” Check out the full article.

Meanwhile, Slate’s blog The Big Money, is advising homeowners facing foreclosure to consider “strategic default,” the fancy name for walking away from your mortgage (and your home). It’s ok, they assure us. I’m having trouble disagreeing.

Go Ahead, Walk Away

There is nothing immoral about ditching your mortgage.

By Mark Gimein | October 8, 2009

A solid two years into the housing bust, the national foreclosure wave doesn’t show the least signs of abating. Banks that had called a foreclosure moratorium are now back to the business of taking back properties, and the foreclosure numbers are again at record highs. As the foreclosures rise, so too does the criticism of “walkaways” who hand the keys to their drastically devalued houses back to the bank.

Last month a study from the credit reporting agency Experian and consulting outfit Oliver Wyman estimated that close to a fifth of troubled mortgages involved borrowers who were “strategically” defaulting—walking away from mortgages they could pay but decided not to because they owed more than their houses were worth. Self-assigned guardians of financial ethics see the willingness of borrowers to abandon their mortgage debts as a sign of the “erosion of social and moral standards.” The aim of these critics is to shame debtors into sticking with their mortgages. That’s something debtors should take with a grain of salt. There are many good reasons to keep paying your mortgage and avoid the black mark of foreclosure, but the immorality of sticking the bank with a loss isn’t one of them.

Some observers, like Zubin Jelveh of the New Republic, have taken issue with the Experian-Wyman study’s methods, arguing that it was too broad in defining “strategic” default. But unlike some other reports that play up the number of deadbeat debtors, this study uses a fairly narrow and defensible definition to arrive at its conclusion that 18 percent of mortgage defaults are “strategic.” (Experian showed the report to The Big Money, but asked that it not be posted.) The study focuses on borrowers who, once they hit 60 days late, roll straight through to foreclosure without ever making another payment and manage to stay current on all their credit cards.

These are pretty good signs that someone could try harder to pay the mortgage—an idea supported by the fact that the borrowers who fit the model often had higher credit scores (and so probably more financial knowledge) and tend to live in states such as California, in which banks can’t keep pursuing them for more money after taking their houses.

So let’s say the Experian/Wyman study is right in its assessment that there are a fair number of strategic defaulters. Those who use this study and others like it to argue that the foreclosure problem is one of moral failure among borrowers are still wrong. Borrowers who walk away from mortgages calculating that they’re better off taking the risk of not paying aren’t abusing the system. They’re using it the way it’s designed to be used.

Read the rest of the post.

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