Less Stigma, More Ditched Mortgages?

Social Stigma vs. Financial Self-Interest

Across U.S., Food Stamp Use Soars and Stigma Fades

--Headline, The New York Times (11/28/09)

[A new academic paper] argues that far more of the estimated 15 million American homeowners who are underwater on their mortgages should stiff their lenders and take a hike.

--Kenneth Harney, "The Moral Dimensions of Ditching a Mortgage"; The Washington Post (11/28/09)

During the Vietnam War, civil disobedience consisted of burning your draft card.

In Colonial New England, civil disobedience took the form of throwing highly taxed tea into Boston harbor.

Might civil disobedience, circa 2010, manifest as homeowners ditching their underwater mortgages, even though they still have the means -- at least for now -- to pay them?

Moral "Double Standard"

Called "strategic default," the practice is the subject of a new academic paper by Brent White, a Professor at the University of Arizona Law School. White argues that strategic default is a rational response for millions of beleaguered homeowners:

"Homeowners should be walking away in droves," according to White. "But they aren't. And it's not because the financial costs of foreclosure outweigh the benefits. Most owners are too worried about feelings of shame and embarrassment following a foreclosure, and ignore the powerful financial reasons for going through with it," he said.

--Brent White, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis"

According to White, would-be defaulters can organize their financial affairs to minimize the disruptions caused by the inevitable damage to their creditworthiness. That includes making major purchases prior to defaulting.

Aside from the morally repugnant nature of Wall Street executives paying themselves billions barely a year after their recklessness jeopardized the financial system, their behavior risks an even greater harm: it allows millions of Americans to rationalize their own bad behavior.

"The system screwed us," they might logically conclude. "Why shouldn't we screw it?"

Tax Trial Balloons

Gov't. Financial Squeeze = Homeowner Squeeze?

The mortgage-interest deduction has been a political no-go zone for decades. The same for local property-tax write-offs. But with billowing deficits and the need to raise trillions to help pay for health-care reform and the economic stimulus bills, somewhere, somehow, Congress is going to be pressed to raise revenue.

--Kenneth Harney, "Going Where Congress Hasn't Gone"; The Washington Post (8/29/09)

Kenneth Harney's column today makes the (valid) point that just because Congress is in recess, doesn't mean that policy shifts aren't afoot.

In fact, Congressional staff are right now busily proposing all sorts of revenue-raising ideas to close gaping budget deficits as far as the eye can see.

"That's Where the Money is"

At the top of the list: various proposals to limit the size of mortgages that qualify for interest deductions; eliminating the itemized deduction for state property taxes; and raising capital gains taxes.

To "lessen" the impact of the foregoing, Congress would employ incremental phase-in's (for higher taxes) and phase-out's (for deductions).

Locally, the City of Minneapolis is floating the idea of annual, 10%-15% property tax increases practically off into the sunset.

Why are homeowners such fat targets?

To paraphrase what Willie Sutton said when asked why he robbed banks: 'because that's where the deductions are.'

High-end Double Whammy

Jumbo Loan Premium to Shrink

With the collapse last year of the private mortgage bond market on Wall Street, home buyers, builders and refinancers who relied on jumbo financing were left with few sources except at punitively high interest rates and huge down payments.

--Kenneth Harney, "A Big Boost for Buyers Seeking Jumbo Loans" (The Washington Post; 3/21/09)

Ordinary economic mortals are probably not feeling much empathy for the relatively affluent these days -- especially if they have a connection to Wall Street.

However, today's housing market has delivered an unprecedented wallop to upper bracket Buyers: at the same time their wealth has been whacked -- in some cases by more than 50% -- by falling asset prices, their loan costs are at (relatively) nosebleed levels.

While "conforming" (under $417k) mortgages dropped to as low as 4 1/2% last week, so-called jumbo loans still cost 6 1/2% or more.

It's tough to be rich, huh?

Actually, that's a huge gap, and arguably, an unfair one. More to the point, closing it offers lenders some tantalizing profits.

So, as Harney is reporting in his weekly column, a number of lenders (including Bank of America and ING) are rolling out jumbo loan products that aim to slice this premium. (The impact is less in the Twin Cities than on the coasts, because home prices here are much lower.)

Fannie & Freddie "Add-On Fees"

"Airline Pricing" Spreads to Mortgages

Both Fannie Mae and Freddie Mac say they are tacking on extra fees to counter higher risks and losses associated with certain loan products, buyer equity stakes and credit scores . . . However, real estate agents, mortgage bankers and brokers are incensed at the new round of fee increases, calling them counterproductive in an environment in which housing needs help, not new impediments.

--Kenneth Harney, "From Fannie and Freddie, Here Come the Fee Increases"; The Washington Post (2/14/09)

Call it the spread of the "airline industry model." *

They can't figure out how to make money -- in fact, they lose billions every year -- so they have to recoup it any way they can. So they start tacking on fees -- lots and lots of them. For checking extra bags, in-flight food, headphones, fuel surcharges -- you name it. Each year, the list only grows longer -- and more annoying.

Get ready for the post-housing bust Fannie and Freddie pricing model. In addition to paying mortgage interest, borrowers can now expect to pay two different kinds of add-on fees:

One. Premiums, called "delivery fees," for Buyers who can't meet (newly conservative) downpayment thresholds; and

Two. Surcharges for disfavored housing categories (because they're supposedly higher risk). That includes condominiums and owner-occupied duplexes.

Just one more illustration of the old saying about banks "lending you an umbrella when it's sunny and demanding it back when it's raining."

And that's private lenders.

Add government bureaucracy and inefficiency to the equation, and you get the worst of both worlds (JFK famously remarked that Washington "combined the charm of a northern city with the efficiency of a southern one").

*The other parallel with airlines? Custom pricing (no two borrowers pay the same rate) that literally changes minute-by-minute. I attribute this latter phenomenon to modern computing power as much as anything else.