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The death of the stigma of default revisited

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By Michelle Malkin  •  November 30, 2009 12:34 PM

I know this is a futile battle. Not sure why I keep trying to fight it. I can’t help it. So, here I go again.

In January 2008, I lambasted the bipartisan “victim politics of foreclosure” and the disappearance of the stigma attached to defaulting on your mortgage.

A refresher:

From President Bush to Hillary Clinton, Barack Obama and John Edwards, to Mitt Romney and John McCain, virtually everyone in Washington agrees: The government must Do Something to stop home foreclosures across the country. These leaders agree on the total presumption of homeowner innocence. The borrower-as-victim and lender-as-predator storylines are etched in stone. Can’t let reality get in the way of election-year pander-monium.

Special guests at the State of the Union address are usually extraordinary heroes, entrepreneurs or citizens who’ve gone above and beyond the call of duty. On Monday night, one of those guests was an Indiana woman whose claim to fame is that she called a 1-800 number and was assisted by the “Hope Now Alliance,” a group Bush convened, which, according to him, “is helping many struggling homeowners avoid foreclosure.”

Subprime victims are the new heroes. Welcome to the politics of foreclosure.

Housing Czarina Hillary immediately jumped on the president’s address and on news that foreclosure rates skyrocketed 79 percent over the last year. She reiterated her call for “a 90-day foreclosure moratorium on subprime mortgages and a 5-year freeze in rates on subprime loans.” Borrowers who knowingly bought more house than they could pay for have no place in Hillary’s world. “It is indisputable that brokers and mortgage companies lured families into mortgages that were designed to end in foreclosure,” she stated in a Denver Post questionnaire this week.

Continuing the theme of duped borrowers, Sen. Chuck Schumer is crusading for more federally subsidized “mortgage counseling.” He wants $200 million more, in addition to the $180 million for “Housing Counseling Assistance” that he helped stick into the omnibus spending bill last year. A significant portion of that will go to government-approved counselors affiliated with left-wing activist groups such as La Raza and ACORN.

I certainly have sympathy for borrowers who may have been misled. But for every “predatory lender” out there, you can find a predatory borrower. For every fraud-minded loan officer or mortgage broker, you can find a homeowner who secured financing and bought a home he knew he couldn’t afford with little money down and bogus or no income verification. Washington is silent about this reckless behavior, which it is encouraging both tacitly and explicitly.

Now comes word from California that some of these homeowners Washington is rushing to rescue are simply walking away — abandoning their mortgage commitments and contractual obligations. Poof: “Foreclose me. … I’ll live in the house for free for 12 months, and I’ll save my money and I’ll move on,” one homeowner blithely told the Los Angeles Times this week.

The stigma of default is gone. Political rhetoric absolving borrowers of their responsibilities — and encouraging them to spend, spend, spend even more — has made it possible. And so has federal legislation intended to “help.” The omnibus spending bill passed last year prevents the IRS from taxing mortgage forgiveness as income up to $1 million for a two-year period.

Finance blog Calculated Risk reported last week that increasing numbers of homeowners are walking away from their homes by choice. A Wachovia executive noted during a conference call that they are “people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they’ve lost equity, value in their properties…” Some are bailing for cheaper homes in the same neighborhoods. There’s even a term that’s become popular over the last couple of years — “Jingle Mail” — that describes when homeowners cut loose and mail in the keys to the bank. Ho, ho, ho.

The true victims in this “crisis” are those who paid for homes within their means and those who waited to enter the housing market.

In September, I noted how “The Ant and the Grasshopper” fable extolling the value of thrift had been completely turned on its head.

In October 2008, I provided a grim update of the continued spiral of fiscal recklessness stoked by both parties:

I can’t tell you how disgusted I am by the apathy over the Paulson/Bush/Pelosi/Reid wealth confiscation program in full swing. Every time I hear someone yammering on the radio or TV about Barack Obama’s plans to socialize this or that, I want to hurl.

The bank nationalization Trojan Horse was brought to you by a GOP administration.

Both presidential candidates have enshrined mortgage “rescues” and foreclosure prevention as primary government goals.

Both candidates supported the $25 billion automakers’ bailout. And now GM wants more.

The Democrat Congress and the GOP White House are pursuing home ownership/preservation at all costs…

Thrift is dead.

Fiscal conservatism is dead.

Just walk away.

Now, here we are at the close of November 2009. Has anything changed? Only for the worse:

Obama is pressuring lenders to give defaulting homeowners even more of a reprieve through permanent mortgage modifications — a new entitlement supported by both parties that is a recipe for more and more mortgage defaults and even bigger entitlements for wealthier homeowners looking for a bailout.

Meanwhile, a law professor has discovered what underwater homeowners have been incentivized to do since at least January 2008 when I first warned about it: Walk away. Oh, and he also recommends that you splurge on big-ticket consumer items right before you bail.

Hey, why the hell not? We live in the Land of No Consequences now, remember?

Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don’t feel guilty about it. Don’t think you’re doing something morally wrong.

That’s the incendiary core message of a new academic paper, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” by Brent T. White, a University of Arizona law-school professor.

White argues that far more of the estimated 15 million American homeowners underwater on their mortgages should stiff their lenders and take a hike.

Doing so, he suggests, could save some of them hundreds of thousands of dollars they “have no reasonable prospect of recouping” in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume.

“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.”

Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, “one can have a good credit rating again — meaning above 660 — within two years after a foreclosure.”

Better yet, you can default “strategically”: Buy all the major items you’ll need for the next couple of years — a new car, even a new house — just before you pull the plug on your current mortgage lender.

“Most individuals should be able to plan in advance for a few years of limited credit,” says White, with minimal disruptions to their lifestyles.

***

Repeat after me: Property-value preservation is not a civil right. Teach your children. Tell your friends. Maybe it’ll sink in. I’ll keep trying.

***

On a related note about the loss of stigma: Reviewing NYT’s Food Stamp Report, Part 1 of 3: Paper Cheers Growth, Loss of Stigma

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