Republicans Seek To Prevent Strategic Defaulters From Getting Taxpayer Bailouts

Tyler Durden's picture

The recently ubiquitous phenomenon of homeowners strategically defaulting on their mortgage, and using the proceeds to "buy season tickets to Disneyland…take a Carnival cruise to Mexico…” and go out to dinner more often" and generally boost "consumption" has received wide media attention if not societal condemnation... Yet. Republicans have launched a Motion To Recommit HR 5062 which 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." We doubt this proposal will be accepted lightly by Washington which is now convinced that since the rest of the world is collapsing and it can issue debt with impunity, the much coveted and thermodynamically impossible free lunch is finally here.

As Chris Vieson, floor assistant to republican whip Eric Cantor says, "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."

We are skeptical this will have any preventative or behavioral-modifying impact, however. The only benefit from bankruptcy "recourse" is that Americans lose easy access to credit. However, with banks contracting credit as is, without needing the help of FICO, it has become painfully obvious that the marginal benefit of a 750+ credit score is now negligible compared to the benefit from using up redirected cash flow for immediate needs. And as banks end up holding the defaulted real-estate, which is no longer cash flow positive, the administration will likely very soon need to provide another FASB miracle which converts zero or negative cash flow into record sources of capital. Otherwise, the "cold fusion" consolidation witnessed recently in Spain will seem like child's play when our own domestic bank dominoes start collapsing.

Full note from Chris Vieson.

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.

Strategic Defaults

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. 

Future Bail-Outs

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.