There Oughta Be a Law: Make Defaulting on Mortgages a Federal Crime
Dolors & Sense
by Sanford Rose
KISSIMMEE Florida—(Weekly Hubris)—5/30/11—About a quarter of people with a mortgage are upside down. They owe more on the house than it is worth.
With home prices still diving, that figure will probably reach 40 percent by the time we touch market bottom, which is not expected until 2015.
Think of it. Two out of every five American families with a mortgage lien will be spending Saturday nights debating whether they should do the economically sensible thing—default.
Many will decide to pack it in. Why not? In some states, the lender is not even entitled to pursue the mortgage borrower. In 38 states, he is, but almost never does so because the costs are greater than the expected returns.
So the lender just takes the house and adds it to his already swollen inventory of foreclosed properties which, nationwide, now approximates three million dwellings.
Whenever prices rise, which they errantly do from time to time, lenders dump some of this inventory onto the market, virtually guaranteeing that the price rise will quickly abort and morph into yet another decline.
Price declines have already wiped out $8 trillion in home equity. The average mortgagor has only about a 19 percent stake in his property. By 2015, that share will have eroded to 10 percent.
Yesterday’s defaulted mortgagor has become a renter. But today’s mortgagor is little better off. He has become a renter-in-waiting.
The Obama Administration has done little to ameliorate the housing problem. It was THE problem two-and-a-half years ago. It remains THE problem today.
Holding a voluntaristic viewpoint, the Administration decided that it could do virtually nothing except by agreement with lenders.
Curiously, lenders rarely agreed to make it easier for borrowers to survive by reducing their mortgage principal.
The Administration never mustered the gumption to force a change in lender behavior.
Not being able to beat up big guys, maybe the government can now unload on little guys.
Maybe it can pass a law saying that it is illegal—a federal crime—to default on a mortgage unless one can prove inability to afford the monthly payments.
Such an action would restrict people’s freedom in the short run but, by helping to preserve their net worth and thereby greatly sustain their buying power, it would make them a lot freer in the long run.
Sanford Rose
Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)