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.

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Marla And Me's picture

Nice work caconhma!  Your words sure are helpful in rebuilding the moral fabric of our country.  How much are you paid per hour to post troll jewels like the one you just posted? 

caconhma's picture

It is impossible to appropriately treat a sick patient without accurately identifying the disease, its origin and history. Telling a lung cancer patient that he has a cold will not do any good. It is vital to know the truth.

 

To change a country, where 50% of its population do not pay any taxes and live on welfare and/or government subsistence, through democratic elections is impossible.

Tortfeasor's picture

As if race has anything to do with the "diagnosis".  Bigot

Marla And Me's picture

I'm specifically referring to your racial and religious epithets.  We are all one.  Anybody trying to convince others otherwise should be scrutinized accordingly.  We have met the enemy and the enemy is us...

Suisse's picture

We are all one? What do I have in common with someone who just got off the boat from Hong Kong?

pan-the-ist's picture

Oh- Let me answer.  You were possibly given and took advantage of many opportunities because your culture/genetic makeup/nurture/nature/God made you do it.  Perhaps the person getting off the boat from Hong Kong is trying to do the same thing you are.  That would mean that you both have something very important in common.

Careless Whisper's picture

This isn't about the FHA.

This is a trial balloon to see if the bankstas can get legislation to have recourse against strategic defaulters.

The NY Times article a few days ago was an obvious plant by the banks to create jealousy and portray someone under water who defaults as taking advantage.

Marla And Me's picture

We know it's not about the FHA.  "caconhma" or whatever his name is is trying to do the same dirty trick as the NYT; he's hijacking the thread by trying to blame the "jews" and the "incompetent Negro" for our situation.  Divide & Conquer.  The oldest trick in the book.  Can't let him get away with it.

Marla And Me's picture

We're all human Suisse.  In case you didn't know, we all have the same mother.  No, really, we do.  Do some research on mitochondrial DNA if you don't believe me.  Expand your circle of circle of friends outside of your comfort level.  Travel the world.  You'll find out we are much more alike than we are unalike. 

Problem Is's picture

"How much are you paid per hour to post troll jewels like the one you just posted? "

It is one of Rahm-baby's White House intern sock puppets trying to discredit one of the administrations most effective economic critics...

Zero Hedge.

caconhma provides the outrageous post:

MSM: "Look at the ghastly racists on ZH!!"

Oppose Obummer or the Wall Street banks... You're a racist...

Calling critics and dissenters "racist" is a provable pattern in political discourse.

Marla And Me's picture

The troll problem has been growing exponentially - pun intended (where's Mako when you need him) - recently.

Oftentimes, the commenters and their perspectives are just as much, if not more valuable than the actual articles.  Unfortunately, the price to pay for free access to all is that threads can be hijacked by imbecilic remarks that add nothing to the discussion.  The fact that "caconhma" posted his rubbish right at the top of the thread tells me that his intent was exactly that - hijack the thread.

WaterWings's picture

Imagine that these are not simply sick individuals, but paid disinfo agents. They want to affect the flavor in the comment section.

Marla And Me's picture

I know they do.  Notice that since I called him out on it, he has been silent.

i.e. Police infiltrating WHO protests in Montebello - http://www.youtube.com/watch?v=7S1nHvvkzvA&feature=PlayList&p=FA7CF36212306397&playnext_from=PL&playnext=1&index=3

The depravity never ceases to amaze me.

Big Red's picture

Thanks for posting that link, it always come up in my memory when I try to enumerate false-flag issues, and it makes the little guy think and look around the next time something smells funny.

Geoff-UK's picture

Strategic defaulters screwing over banks that gave mortgages to illegal aliens with minimal paperwork and "no money down"?  I say, "bwa ha ha ha!"

 

Govt tax breaks to these strategic defaulters, pulling money out of MY pocket to give to them?  Not so funny.

AnAnonymous's picture

Funny how in the land of the braves some are more entitled to a certain course of actions than others.

Strategic default are available to too many people to the taste of the Republicans. Should be a priviledge, not an option open to commoners...

Gully Foyle's picture

 AnAnonymous 

That is a load of shit. You have people not paying their mortgages, not paying their credit cards but buying new cars and tvs. Why the fuck do they deserve a break.

Meanwhile you have a majority who are trying to play by the rules and receiving minimal assistance.

At one point strategic default was about rebellion. Now it's about scamming the broken system.

partimer1's picture

the system is broken.  the capitalism is gone.  what's left is the system to fuck the savers and good majority of people working hard day by day and behaving normally. 

WaterWings's picture

Obama needs to 'go street' and kick some ass! Here's some perspective:

http://www.youtube.com/watch?v=yghFBt-fXmw

schoolsout's picture

Da Boyz did it, why can't the lowly peons take advantage, too?

 

I'm not advocating it, but the gov't has taken any and all morality about these type events off the table.

pan-the-ist's picture

Each month when I make my mortgage payment I ask myself why I am doing it.  If the government and the banks have no respect for money and debt, then why should I?

Jeff Lebowski's picture

As do I. 

I have two friends who have decided to stop paying their mortgage, for no other reason than it is prohibitive to their lifestyle and they are underwater, as am I, on their mortgage.

Friend A has not paid his mortgage in 14 months.  He has since purchased a Kimber 45, AR rifle, vacationed in Florida, and purchased a boat.

Friend B has not paid his mortgage in 6 months.  He has put his non-payment to work by purchasing hair-plugs for $10,000.

I have no faith that we will discontinue the negative reinforcements of strategic defaults, but perhaps it's time to reward those who do not.

Would a more simple solution than further legislation be to offer a multiplier on lines 6 and 10 of the schedule A of the 1040?  (Real estate taxes and mortgage interest)

bigdumbnugly's picture

Friend B has not paid his mortgage in 6 months.  He has put his non-payment to work by purchasing hair-plugs for $10,000.

 

Friend B must be a really deep thinker...

Jeff Lebowski's picture

Well, he's a little of both, so you're both right.  Between his wife and himself, they make about $125k a year, and defaulting on a $250k loan for a house that is worth $175k.

It's the bank's fault, of course.  They put a gun to his head 3 years ago and forced him to refinance and pull out equity in a house they've lived in for 10 years.

For college, you ask?  Maybe medical bills?

No....  A boat.

Conclusion:  Jeff Lebowski has a balding asshole friend with a boat.

bada boom's picture

Perhaps he got tired of looking at the branch manager's wonderful hair implants each time he went to the bank to pay his mortgage and said to himself,

Shit, I can either give money to the bank to have them spend it or I can spend it myself? 

Either way, money is being spent.

Ah fuck it.

Bendromeda Strain's picture

Friend A plans on taking out a lot of men

Friend B plans on consoling their women

Almost Solvent's picture

Strategic defaults work much better when:

(1) You are way underwater with no hope anytime soon (banks are in no rush to foreclose and saturate the market even more); or

(2) You don't have income sufficient to make the payments in any event.

Too bad I live in a Western NY suburb (high property taxes keep my property values low!!) with equity in my property and the ability to make my mortgage payments.

 

If I try to default, I am really shooting myself in the foot as I could sell my house for a profit and the bank knows that and would not wait 14 months to do nothing.

 

I should have bought an overpriced condo in Arizona or Florida.....

FEDbuster's picture

They are to big to fail and change the rules as they see fit.  You and I are tied to some out of date code that punishes the small borrowers upon default.  Now they run your credit report to buy insurance and when you get a job.  They want to apply a scarlet letter to defaulters, and give billion dollar bonuses to those who get bailouts.

Dr. Richard Head's picture

in all fairness, the credit report for employment is not as common as you think.  FCRA rules require credit reports only be run for positions were credit is relevant to the position.  Not many of those positions out there.  99% of background checks are completed for verifying past employment, education, credentials, and looking for past criminal history.

ghostfaceinvestah's picture

I was thinking the same thing.  Didn't MS walk away from some commercial real estate?  Why isn't there a bill denying them access to the Fed discount window?

Assetman's picture

Yeah.  It's a huge double standard.

What I find surprising is that the Republican stance on the strategic default issue makes them look callous to the masses, in the context of supporting the largest bailout of the banking system ever.

That's not likely to win over the hearts of the majority of the electorate.

Perhaps the Republicans sponsoring this should have imposed market to market accounting on all the too-big-to-fails and take away the safety net-- in combo with the strategic default issue.

That would be a little more evenhanded, now wouldn't it?

Hellholeratrace's picture

Exactly.  Borrowers "strategically default" on CRE loans whenever it makes economic sense for them to do so, and then for example, can go get a fannie loan to finance their next apartment project.

Augustus's picture

CRE loans are underwritten on an entirely different basis.  That does not mean that the underwriters or appraisers don't make screw ups and have losses.  The general idea for the CRE was to make a 70% LTV first mortgage with current net income (not projected income) giving a 1.3X debt service coverage.  Rates were also higher than for home loans.

However, if it does become the norm for society to decide that there is nothing wrong with robbing the bank by walking away from repayment obligations, high loan to value home loans will just not be available to anyone.  It has never made sense to me to give high LTV mortgages for the larger home prices.  Originally the loan limits were fairly modest and would only cover the starter home price or the first move up home.  After that the downstroke % went way up and the term for repayment was shorter.

What the scam artists are doing now is completely wrecking the most successful home ownership system in the world.  There was a NY Times article a few days ago dealing with the default issue.  A couple in Florida had decided to quit making payments.  They had refinanced the home a few years ago and had taken money out to use in their business.  One of the uses was to buy a new truck and raffle it off for the sales people.  Now the business is not doing so well and the house price is down.  They decided that they could live a little better if they quit making the mortgage payment, so they stopped that expense.  The real money quote in the whole article was from the wife, something like "why should we pay those bankers as they are just crooks anyway?"  So the real question now is how the heck does a borrower come to the conclusion that the banker who fulfilled their request for a loan just as they asked now become a crook and it does not matter if the borrower simply steals from them?  The more that concept becomes accepted, the more difficult loans will be to come by.  Then we will hear that bankers are being too difficult in underwriting.  And that is exactly what we are seeing play out, just let it build for another year.

Assetman's picture

No doubt there are scam artists.

Problem is, they are everywhere... from origination to default.  From borrowing party to lending party.

I agree that banks have every right to tighten loan standards if borrowers go into mass strtegic default mode.  Problem is, they get handed a mountain of collateral they have to maintain, and will likely to continue to erode.  Who's gonna buy that mounting inventory if loan standards are tight?

I can't explain the logic of some borrowers in your example.  I also can't explain why a bank or a mortgage originator would approve loans with no documentation-- or a LTVs that absolutlely make no sense from a business standpoint.

In the end, borrowers and lenders will be best served in this environment by objectively negotiating loans based on their current market values and sharing in the losses.  I haven't seen financial institutions moving in that direction very quickly-- and the government hasn't really helped out the process at all.  If banks tighten loan standards, they pretty much ensure that the housing price/default destructive loop continues.

 

almost_have_a_name's picture

I'm getting tired of playing by the rules too. Everyone around me has enjoyed

the credit bubble and they constantly complain about their credit card rates, home

taxes and school fees.

If you don't play the credit card game your punished in this country. Good thing

I racked up and paid off 100K on American Express in the 90's as a computer

consultant, they are offering me a Gold card. Time to buy a sail boat courtesy

of the American "Fiat" Express.

 

See you later Land Lubbers !

 

 

 

schoolsout's picture

A blowboat?  lol

 

Just kidding...

The Merchant of Venice's picture

I was crushed to learn that Chamillionairre chose strategic default on one of his Houston properties while also maintaining a custom chop shop also in Houston.

At least he's still "Ridin'"

WaterWings's picture

Rulez are meant to be broken, punk ass bitch!

---

White face? No problem!

http://www.youtube.com/watch?v=CGOt8dZRsHk

AnAnonymous's picture

People walking from their obligations dont belong to the house owners population only.

Where is the project of law to pin all the others?

MarketTruth's picture

At one point strategic default was about rebellion. Now it's about scamming the broken system.

Not necessarily that simple. As an example, Donald Trump had defaulted as the RE he was holding a debt note on was not producing so he defaulted and folded that company. As i recall, he has actually done this a few times. So defaulting is a BUSINESS decision based on sound common sense of personal/business financial benefit.

PS: A few banksters in the past year or two have defaulted (jingle mail) properties back to their owners. But of course this gets virtually no press.

 

PPS: If you REALLY want to get into it, the bank probably had VIRTUALLY NO MONEY to lend you for the loan per se. It is only AFTER you sign the contract that the bank can then CREATE the fractional reserve money in their ledger to lend you. In other words, you have a physical item and the bank had virtually nothing.

Mesquite's picture

And another point, seldom mentioned...In the banksters haste to bundle up those mortages, and peddle em to make their bonuses, now it may be hard to actually come up with the original mortgage..This gets 'out', it can get really messy..

tmosley's picture

At one point strategic default was about rebellion. Now it's about scamming the broken system.

Who says you can't do both?  Lots of people got rich during the American Revolution, I'm sure plenty of them loaded up on loans and defaulted, just like these people are doing.

The system is broken.  There is no fixing it, so you might as well make some money during its demolition.

hbjork1's picture

+5

Gully, if it was "strategic", it was always about scamming the broken system.

Use of "strategic" default is just an aspect the feeling or "need" for entitlement that began to replace the need for honor and community starting during the 60's or early 70's.

As a child, I heard stories of people during the 1930s of people who refused public assistance because they were ashamed to be considered dependant.  That, of course, ment that what their neighbors thought of them was more precious than a little bit of money.  

"Sow the wind, reap the whirlwind.  If it has no stalk, the bud shall yield no meal."

So we can conclude that the type of problem we are having is not a new one for mankind. 

IMO this evolution of attitude started decades ago and has been enhanced through the years by the increasing available of communication means (like TV) providing instant gratification.  The Vietnam War and behavior of some of the people in responsible positions, hasn't helped.

What other real people think of us has gotten less and less important.  What we can acquire to impress our now more remote next door neighbors has become more inportant.  

 

 

lawrence1's picture

Since the bansters and other elite continue their theft with impunity, why shouldnt everybody else not take whatever advantages they can?  There is no sign that those in charge have any intention or will to solve the basic fiat debt mess, so let the whole fucking system collapes, the sooner the better and dont let the fucking republicans limit anyone else's ability to make the best out of a collapsing fundamentallty unjust corruption infested system.

GeorgeHayduke's picture

Yep. it was okay when their buddies were doing, but now that the peons have caught on, it's time to get all morally righteous about it.