Felix Salmon

Can Treasury justify suing homeowners in default?

By Felix Salmon
August 13, 2010

House Democrats John Conyers and Marcy Kaptur have put together a strong and compelling letter asking Tim Geithner and FHFA director Edward Demarco to put an end to the silly and counterproductive way in which Frannie have decided to start suing homeowners they consider to be strategic defaulters: “pursuing expensive litigation against a vulnerable population when there appears to be little to no economic incentive is questionable at best,” they write.

The letter also points out that a lot of the onus here will be on servicers to decide who counts as a strategic defaulter — and no one, inside or outside government, trusts the servicers.

Other questions also seem to be open, for instance the proportion of received monies which will end up with Treasury as opposed to mortgage investors; the degree and way in which homeowners will be engaged prior to being sued; and the criteria which Frannie and the FHFA used when they decided to implement the policy.

I look forward to reading the replies from Geithner and Demarco: although the letter is mainly asking for action rather than a written response, a formal letter in reply would surely shed some useful light on what exactly is going on with this idea, and how committed the administration is to following it through.

5 comments so far | RSS Comments RSS

It amazes me that individuals were not tied to their mortgages in the first place, but this is as frivolous a venture as offering the credit to those who shouldn’t have qualified. Any ‘fixes’ to problems or incentives brings out the corrupt to take advantage and the tax payer loses no matter what the proposed ‘solution.’

As a taxpayer and a responsible homeowner who didn’t get in over their head by taking on too much debt and is still paying, I would be upset that others walked away scot-free. I feel sorry only for those who lost jobs, not the ones who were trying to be the Joneses on credit.

Posted by hsvkitty | Report as abusive

So…its’ “silly and counterproductive” to pursue debtors for their legally-owed debts. Interesting opinion, Felix.

The question of “strategic default” is irrelevant — if the debt is legally-owed, legal collection alternatives should be pursued.

Similarly, where the money ends up is irrelevant.

Sure, people can default for many legitimate, human reasons. Sorry, that’s life. Why should anyone expect forced charity from his neighbor? People who default aren’t “victims” in any sense — they made bad decisions, had bad luck or were simply deadbeats, but that doesn’t excuse them from taking responsibility for their lives.

Posted by dbsmith1 | Report as abusive

Felix, of course Treasury is justified in suing strategic defaulters, who by definition have the money to pay their mortgages, they just choose not to, presumably because their mortgage is for more than the current market value of the home.

Most strategic defaulters are not, despite what Representatives Conyers and Kaptur say, “a vulnerable population” that offer “little to no economic incentive” to the Treasury to recoup its losses. Did you not see David Streitfeld’s article in the N.Y. Times on July 8th? From the lead:Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population. The article goes on to show that homeowners whose properties have a mortgage of more than $1million have stopped paying at a rate that greatly exceeds those who hold cheaper mortgages. These are exactly the people whose feet we want to hold to the fire, because if they get away with it this time, they’ll just feed their ill-gotten profits from the housing credit bubble into the next bubble. Morally, it’s wrong for responsible tax paying lower class renters to have to pay for the consequences while the rich get off, as hsvkitty writes above, “scott free”.

Posted by Strych09 | Report as abusive

Hey Felix,

When I commented on your two current housing posts, I didn’t realize that you’re only interested in voices that agree with your opinions! My mistake, matey.

I often enjoy and respect the intellectual level of your content; too bad you aren’t equally enlightened about allowing others to dissent!


Posted by dbsmith1 | Report as abusive

Don’t the managers of Fannie and Freddie have a fiduciary obligation to their shareholders, whomever they may be? That fiduciary obligation is their legal duty, and it certainly doesn’t stop when the shareholders are taxpayers.

On a practical note, if Fannie and Freddie give up any pretense of acting like a business, the whole edifice crumbles. Since they are the *entire* housing market, we need them to act rationally.

Posted by DanHess | Report as abusive

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