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Republicans Seek To Prevent Strategic Defaulters From Getting Taxpayer Bailouts
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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From Bloomberg:
June 10 (Bloomberg) -- American International Group Inc.’s bailout had a “poisonous” effect on the U.S. financial system because it demonstrated the government would protect Wall Street firms from their own risk-taking, said a Congressional panel.
The Federal Reserve could have acted earlier to find a privately funded solution for New York-based AIG before the September 2008 rescue, the Congressional Oversight Panel said today in a report. The bailout, which has swelled to $182.3 billion, transformed banks’ financial bets into fully guaranteed obligations, the panel said.
“The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace,” said the panel, led by Harvard University law professor Elizabeth Warren. “The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America‘s largest financial institutions and to assure repayment to the creditors doing business with them.’’
The rescue helped prevent an ‘‘utter collapse’’ of the U.S. economy, Treasury Secretary Timothy F. Geithner said in January. Geithner, 48, executed the bailout while he led the Federal Reserve Bank of New York in 2008. Lawmakers called the move a ‘‘backdoor bailout’’ because banks including Goldman Sachs Group Inc. and Societe Generale SA received payments from AIG to settle derivative contracts tied to subprime mortgages.
The report of more than 300 pages faults regulators and AIG management for AIG’s near-collapse. The New York Fed focused on a solution for Lehman Brothers Holdings Inc., which failed Sept. 15, 2008, a day before the AIG rescue was announced.
No Time
‘‘By the time the Federal Reserve Bank reversed that approach, leaving Lehman to collapse into bankruptcy without help and concluding that AIG posed a greater threat to financial stability, time to explore other options was short,’’ the panel said.
The report ‘‘overlooks the basic fact that the global economy was on the brink of collapse and there were only hours in which to make critical decisions,’’ Andrew Williams, a Treasury spokesman, said in an e-mailed statement. ‘‘We have learned from that experience and have been fighting for more than a year to give the government authority to put firms, like AIG, out of existence when their failure poses a danger to our economic system.’’
‘If Everything Goes Gangbusters’
The panel said in the report that the government’s prospects for recovering funds depends partly on the ability of AIG to find buyers for its units and on investors’ willingness to purchase shares if the Treasury Department sells its holdings. AIG turned over a stake of almost 80 percent as part of the bailout and the Treasury holds additional preferred shares from subsequent investments.
‘‘If everything goes gangbusters, we will get paid back,” Warren said today in a Bloomberg Television interview. There is still a “lot of risk for the American taxpayer.”
The bailout includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury Department and up to $52.5 billion to buy mortgage-linked assets owned or backed by the insurer through swaps or securities lending.
AIG owes about $26.6 billion on the credit line and $49 billion to the Treasury. The company returned to profit in the first quarter, posting net income of $1.45 billion.
“I’m confident you’ll get your money, plus a profit,” AIG Chief Executive Officer Robert Benmosche told the panel in Washington on May 26. “We are a strong, vibrant company.”
Plane Leasing, Consumer Lending
If it becomes apparent that AIG won’t repay its rescue in full, the U.S. could consider breaking up the insurer and putting money-losing subsidiaries into bankruptcy, the panel said. Units that are candidates because they require outside funding and may have “limited potential sale value” include the consumer lending business and plane lessor, the panel said.
“Under this approach, the government could avoid indirectly subsidizing money-losing subsidiaries and their creditors, as is currently the case, if the subsidiaries could be put into bankruptcy without affecting other operations or the holding company,” the report said.
AIG leaders allowed the firm to accumulate “staggering amounts of risk” in derivatives and other areas, the panel said. The derivatives unit continued to assume through the beginning of 2008 that credit risk from credit-default swaps was “virtually non-existent,” according to the report.
‘Somewhat Odd’
“AIG’s assertion is somewhat odd given that the company underwrote this risk on behalf of clients who clearly believed there was some risk in these instruments worth insuring,” the panel said.
The insurer, once the world’s largest, insured 100,000 companies, municipalities and retirement plans, potentially affecting 100 million Americans, and was counterparty to some of the biggest financial firms, regulators said at the time of AIG’s bailout.
The breadth of operations weren’t “matched by a coherent regulatory structure to oversee its business.” The Office of Thrift Supervision had oversight of the parent company and failed to limit risks from swaps, the panel said.
Regulators have said that they were forced to save AIG to prevent a wave of failures that a collapse would have sparked.
‘The Blob’
“Panic was so heavy in the markets that it was almost a physical presence,” Fed Governor Elizabeth Duke said in a speech to bankers on June 8. “I kept having this image in my head of the panic being like the monster called ‘The Blob’ that I saw years ago in an old movie. Like the Blob, panic attacked one institution after another.”
Congress created the panel in 2008 to oversee Treasury activities in stabilizing the economy and the $700 billion Troubled Asset Relief Program. The program has been criticized by lawmakers including Senator Maria Cantwell, a Democrat from Washington, and Representative Jeb Hensarling, a Texas Republican, for helping big banks more than average citizens.
Of everyone cited in this article, the only person I would consider credible is Elizabeth Warren, although she is being politically strangled. It is amazing that the Treasury and Fed mouthpieces keep droning on about impending Armageddon if extraordinary measures were not taken based on supposition not fact. My advice, stop it, no one believes it. The bankster bonuses were saved, everything else, not so much.
The republicans still exist? I thought they would have merged with the democrats by now. At least by the way the neo-cons openly brag about destroying the party, you would think they would just disband by now.
If they want to protect taxpayers, just get rid of the FHA. Then there's no way the a default on a mortgage could cost taxpayers money. And then nullify the treasury department's explicit guarentee of fannie and freddie debt. These clowns haven't been giving any opposition to anything. They just rile people over nothing issues, collect campaign contributions and pay themselves with it. Obama's been a godsend to their coffers and their children's trust funds.
+5 But with women allowed to vote, never gonna happen. "Housing is a right."
Morality must be discussed in context. Look at the treatment of:
Student loan debt vs. IRS debt
Renters/Homeowners vs. life long HUD parasites
Large bank owners vs. small bank owners
There is no consistency and therefore no sense of justice in the entire system. We need a complete reset of default rules based around sound, defensible principles.
Nice work as usual on the original thread Tyler. The one thing no one seems to grasp is the all of these debt problems are inter-related and cumulative!
http://www.youtube.com/watch?v=pE3oiKuU8UI
nuff said.
There are thousands of "Red Roof Inns" deals that are upside down out there. The banks have sold them to the FED (like this one) or have hidden them in their closets using "mark to model" fraudulent accounting rules. When the reality of CRE defaults spills into the economy, bank failures will rise to a level never known (including the 1930's).
I don't attempt to provide a solution but first and foremost the homeowner should exercise the right to default on a secured loan collateralized by the asset it's been borrowed against without recourse. Strategic defaults are difficult to prove. A simple rumor of job layoffs is enough to temp anyone with <20% equity to default.
I guess a the following options would help.
1. You're dreaming if you think they'll accept a 1 year debt moratorium without another massive government bailout. So it comes out of the taxpayer pocket either way. Pay now, pay later.
2. Mark to market is declaring victory to deflation, something the banks and TPTB will never allow. They will continue to promote the myth that house values will return to normal any day now. If anything they'll permit more "Mark to Myth" than ever to save the banks and so that the Fed doesn't have to take on another 10 Trillion of debt on the balance sheet.
3.Can't eliminate MBS, another political agenda. That would cause a global economic collapse overnight as Trillions suddenly become worthless.
Lawyers call that "discovery"
Would anyone in their right mind hire a strategic defaulter?
If credit score and job performance were always positively correlated, maybe. But that has never been proven. Which is why some states have made it illegal to check credit in most situations.
It will be interesting to see the long-term effects. A safe haven for those that have resources to start anew? Or sinkhole for the depraved? Either way the FICO situation imposed on America is manipulating slavery. You are not your credit score - the asymmetrical ethics of bankers is what is really depraved.
http://www.seattlepi.com/local/6420ap_md_banning_credit_checks.html
I guess you should ask a Morgan Stanley client.
Would anyone in their right mind hire a strategic defaulter?
Moot point, since nobody is hiring anybody now or for the foreseeable future.
Yes, everyone should be happy to hire strategic defaulters... rather than using a liar's resume filled with academic institutions and "potential" ability, you would have someone you know who can pull the trigger if need be. Further, they've been caught before, next time, hopefully they will use the ounce of prevention method rather than the pound of cure.
Never, never, never have a problem with a calculating individual. You KNOW they will ass fuck you. As a result, risk is vastly easier to assess and you can keep them at arm's length. Further, you can out think them. However, when you deal with incompetance, stupidity, and inconsistency, risk assessment becomes more of an art than a science.
Sure, why not. At least I'd know they weren't stupid.
ALL Americans MUST default on ALL their debt to the Fed-controlled banks. It is not simply a matter of personal choice/preference at this point, but it will determine whether their children and grandchildren are born into and spend their lives in SLAVERY or not.
@Gekko
What kind of pansy talk is that? If you're going to advocate for revolution, at least do it the right way.
http://www.google.com/url?sa=t&source=web&cd=2&ved=0CBgQtwIwAQ&url=http%...
You mean there is actually a right way to conduct a revolution?
You learn something new everyday....
You are a hoot, GG.
+100
+100
+100
From California, to the New York Island
From the redwood forest, to the gulf stream waters
This debt was made for you and me
I hope to see that on YouTube!
While in my view, strategic default is not the answer, there must be a way to ride this down that the pain is shared by all, banks as well as consumer. If banks are not willing to share the pain, and clearly they are not then I will do what is neccessary to insure my survival. But I call bullshit on defaulting on your mortgage just to carry on a lifestyle you clearly could not afford in the first place.
Grow up, and start pulling your share of the load. Remember that generations before you were far less educated than you or me and were given the task of building the greatest country in the world. We can either carry on with what is right or cry poor me. I choose to carry on.
And oh yeah, the current 545 are not what is right for America. Time for a "real change" in Washington. Keep changing them until the will of the people is served.
Silverado
"Was it over when the Germans bombed Pearl Harbor? Hell no! When the going gets tough...????"
The task of building is far easier when there is a clean slate, technological advances are potentially plentiful, abundant and cheap natural resources are available, less oversight and regulation, etc. Not to discount what they accomplished, but our forefathers had literally the land of opportunity. The ability to organically grow, develop products for needs and rudimentary wants, and do it on the backs of slave labor created a completely different atmosphere and incentive base for development.
Our situation, especially with the concept of staple inflation, really acts as the antithesis of opportunity... the destruction of opportunity. Instead of developing products for needs, we have to convince people they want things. We sell often through manipulation rather than true desire to purchase. The cheap and abundant resources that fueled growth have now often times been long since depleted. The complexity of the legal system poses barriers to entry as well as innovation. The tradition of passing down practical living knowledge died long ago and we're left with nothing but bears eating the last crumbs at an abandoned dump site.
Further, we have the conceptual problem that by pulling your own weight, or even more than your share, simply makes you an enabler. This concept presupposes that by pulling your share, you will effectuate change for the better. I think there is an incredible likelihood that our fate is sealed at this juncture and efforts to jockey for position at this time may simply be rearranging the deck chairs on the titanic.
The only argument in favor of "pulling your own weight" is risk aversion... and, it's probably sufficient enough to motivate us to do so... but a lack of alternatives isn't necessarily the most comforting incentive.
The only argument in favor of "pulling your own weight" is risk aversion... and, it's probably sufficient enough to motivate us to do so... but a lack of alternatives isn't necessarily the most comforting incentive.
You have assumed that if you don't pull your own weight, someone else will do it for you. The former suckers are in revolt.
I assume that if we pull our own weight (collectively), there is a chance we can mitigate our (collective) damage to an unknown extent... And, that if we (collectively) do nothing, we are fairly certain of the outcome (hell)... hence our risk aversion. Quadraplegic (possibly dead) or (certainly) dead, your choice. Remember, the political headwinds are for austerity.
If I do not pull my own weight, I do not expect anyone else to do so.
Strategic default is good. It is a great way to hit the banks hard, and maintain ones standard of living. The banks engineered the crisis in order to consolidate the economy under their control. Why pay them anything? This Republican garbage is just about protecting their Wall St masters from having to take ANY losses while they steal the country from us.
It is like trying to win a battle without spending ammunition! At least make the banks spend some ammunition to win the fight for our future. I guess the thing is that they have no ammo. All the TBTF are bankrupt, and should be seized as quickly as possible by the FDIC. How dare they attack citizens trying to survive after taking over $28.2 trillion from the people. All the money they stole is enough to pay off all the damn debt from housing and credit cards etc. The banks deserve nothing.
The GOP demogogy is trying to turn the middle class against itself here. It is in the interest of every middle class person to try and hurt the banks any way they can if they want to be anything but a slave. MORE strategic defaults! Force the banks out into the open with bad debts so large they cannot be hidden anymore, and we may stand a chance of killing the Fed cartel once and for all.
MORE strategic defaults! Force the banks out into the open with bad debts so large they cannot be hidden anymore, and we may stand a chance of killing the Fed cartel once and for all.
Every loan ever made could become a bad loan if every borrower adopted that approach. The suggestion is no different that encouraging bank robbery, If you believe that is the route to exit slavery and put you on the road to prosperity, you are mistaken.
What actions would you recommend, when it's understood that banks keep all their profits, and force taxpayers to assume their losses? I'm interested in your recommendations--serious question.
This will make your blood boil. A young couple is making $200k per year, one as assistant district attorney in S. Ca. After being married for two months, the couple recently bought a $800,000 home with FHA 3% down and received 3% back for closing cost. The home is now worth $650000; they have been living free w/o making any payments (no insurance, property taxes, or mortgage payments) for 6 months. They are planning to drag out negotiations with the bank for another year and then walk away when the bank foreclosures. These are highly educated folks with lots of money which they using for lush vacations and toys. They are considering renting the place for $3500 per month and leaving it as a trash pit for the taxpayers. There are no tax consequences for the debt foregiveness or recourse for the banks. We made the damn walk away thing too easy!!!
That does get the blood pressure up. How would they like it if I just took their boat and did not return it?
Fiat banking in itself is fraud. It corrupts everything and everyone it touches.
They did not take anything from you. So why do you want their boat. On the other hand Banks can have their home. That's all. Why should others or Govt get involved in this transaction between two entities - lender and borrower.
Now, actually read the supposedly nefarious Motion to Recommit in light of that tale. Should that couple be entitled to another opportunity to lift their leg on FHA? Why? They won, huzzah! Now they can just go away...
Errr...because the bank will ask my Congressman to pay for the bank's loss?
This initiative by the Republicans is all about fighting the dynamic that owing money no longer means anything. See this link:
When Owing Money Means Nothing
The basic premise is that economic destruction proceeds from the social consequences of the actions of TPTB which cause a destructive feedback loop - the more easing, the more economic destruction that results.
Every now and then, the politicians will try to push against some element of the forces they themselves have put in place, but to no avail. This is no different. Until they get the whole picture and act accordingly, their actions are just pissing in the wind.
ex VRWC
+1 That is why I file this under no BFD. Apologies to Lunchpail Joe Biden.
I wonder if they will disallow taxpayer ‘bailouts’ for corporations that strategically default also?
Tishman’s ‘Strategic Default’ on Stuyvesant Town http://blogs.wsj.com/developments/2010/01/25/tishmans-strategic-default-...
Fed cuts Tishman Speyer a break [on CHICAGO - Rahm's turf - property] http://www.crainsnewyork.com/article/20100604/REAL_ESTATE/100609923
We'll continue to pay our mortgage until we can't. We bought 5 years ago based on two incomes (mistakes 1 and 2). Now, though living very frugally and having no other debt, we're able to live comfortably on one income.
That all comes to an end if we're ordered to move by the DoD. At that point, we'd have no other option but to default. Our neighborhood is full of foreclosures and empty rentals. We will not be able to pay this mortgage and maintenance costs while establishing another household.
I vacillate daily on the morality of the situation. What a cluster.
I believe DoD has a program for that exact scenario. I would check with your Housing Office or Family Services if you think the servicemember might be on the move.
They do. It's the HAP; however I have yet to hear of anyone actually succeeding with the approval process. We have two friends who filled out the paperwork almost a year ago and they haven't seen anything yet.
Kind of like HAMP...
Ah, well. We have better chances than most because there are only a few bases that we can go to and the other two would be expensive PCSs. Apparently, they are starting to factor in family size and so forth when issuing orders. We'll just have to hope for the best.
Don't walk away just yet. First, if your husband has a security clearance--he's done and could potentially be separated. Secondly, hyperinflation is coming soon and Uncle Sugar will bump up your salary commensurately--so your mortgage payments won't hurt nearly so bad in purchasing power.
It's definitely something we'd have to work with his chain of command on. He does hold a security clearance and there's a lot of conflicting information out there on how something like this would affect it. Some say that it's a pattern of fiscal irresponsibilty that hurts it; others say anything and everything does.
Of course, if things keep going the way they are now we'll be able to send the bank an ounce or two of gold and call it a day! I regret not being more aware of what was going on with housing back when we bought. I'm just thankful that we made paying off all of our other debt a priority years ago.