While the fact of so many underwater borrowers is a drag on the overall economy, these borrowers also present a specific threat: they are the most likely to walk away (i.e., “strategically default”). By doing so, they would cause home values to fall even further, which in turn would put yet more borrowers at risk of going underwater as well. To stop this vicious spiral, policymakers must encourage underwater borrowers both to stay in their homes and stay current on their mortgages.
A foreclosure moratorium, however, would have the opposite effect by essentially eliminating the penalties of a default. If a homeowner is underwater, why not stop paying the mortgage if they can’t be forced to leave the house?So, on the one hand homeowners walking away from their homes is a dire threat to the overall economy. And on the other hand we must ensure that no steps are taken to which would give homeowners any other option other than to walk away from their home.
If you're a homeowner who is upside down on your mortgage and are faced with a bank which refuses to negotiate and which will fervently pursue foreclosure proceedings why wouldn't you walk away? It's the only rational thing to do from an individual perspective.
There are good arguments against a national foreclosure moratorium. But this isn't one of them and the fact that Zwyicki thinks that it is a little disturbing. How can you not see the issues with this argument?
1 comment:
"If you're a homeowner who is upside down on your mortgage and are faced with a bank which refuses to negotiate and which will fervently pursue foreclosure proceedings why wouldn't you walk away?"
In California, you're right. In the vast majority of states (very few of which are having nearly the housing market collapse that California, Florida and a handful of other states and experiencing) there is a very good reason not to walk away.
In Colorado and most states, a lender can bid only the fair market value of the house at the foreclosure sale and bring a lawsuit to obtain what is called a "deficiency judgment" for the balance due. The deficiency judgment can be eliminated only by filing for bankruptcy and surrendering all assets not exempt from creditors or entering into a multi-year payment plan.
Thus, in most states, strategic default makes sense only for borrowers who are judgment-proof.
I don't have any problem with strategic defaults from a moral perspective. Any business would have done the same thing. And, lenders in non-recourse states like California had every reason to anticipate that there would be strategic defaults. The made a bad economic decision when they made loans secured by non-resource mortgages on overvalued houses in a bubble housing market and are now paying dearly for that mistake. Boo hoo. Maybe they'll be smarter next time.
Yes, it is a windfall for homeowners. But, it is a bargained for windfall that everyone knew was part of the deal when the mortgage loans were made in the first place.
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