Hillary's Mortgage Default Moratorium Becomes Moot AND Unwanted!

Friday's Wall Street Journal carried a fascinating editorial by Nicole Gelinas entitled "The Rise of the Mortgage 'Walkers.'"

Essentially, Ms. Gelinas reports that mortgages have an embedded "put," allowing borrowers to simply mail the keys back to the lender, and default. She writes,

"The apparent willingness of borrowers to 'walk away' from mortgage debt," the analysts noted, "has contributed to extraordinary high levels of early default" on loans issued during the 18 months before the mortgage bubble burst. It expects losses to reach 21% of initial loan balances for subprime mortgages issued in 2006 and 26% for those issued in early 2007.

Such behavior, where not precipitated by willful fraud, shows that American homebuyers supposedly duped by their lenders aren't so dumb. They're perfectly capable of acting rationally without political interference.

While mortgage fraud has abounded in recent years, voluntary foreclosures are not by themselves evidence of a newfound irresponsibility on Americans' part. To be sure, until recently, mass-scale voluntary foreclosures were unthinkable. But markets have changed, and people are changing their behavior in response."

Ms. Gelinas notes that, as banks allowed home purchases with as little as no, or 5% down, at the housing market's peak, it was not surprising that, at some point, price declines would trigger this behavior. Note that these borrowers want to have foreclosure proceedings begun.

She further observes,

"In most cases, once a homebuyer splits, the mortgage-securities investors are stuck with the loss. In some states, including California and Arizona, this provision is the letter of the law. In others, the bank forgives the balance of the loan -- a common practice that's unlikely to change now, given the criminal and civil investigations banks are already sweating through.

Essentially, mortgage-bond investors, seemingly unwittingly, sold homebuyers a put option, without properly pricing it, and now homeowners are exercising that option. Moreover, prime borrowers in many markets face the same incentives.

Borrowers acted rationally in response to market forces and incentives during the bubble: Buy a house because prices always go up; you can't lose. Many are acting rationally now: Mail the keys back and un-borrow the money, because prices are sinking fast while the debt isn't. When the house was purchased not as a first home but as a rental investment, the decision is even easier. Politicians keep saying that Americans need protection from their big, bad lenders -- but that protection is already there.

Of course, there's a price. Mortgage "walkers" will take a hit to their personal credit rating. Yet this once-forbidding punishment may be discounted. That's because, just as when markets change their behavior, people change, when people change their behavior, markets change also.

If hundreds of thousands of people with decent work histories are going to have less-than-stellar credit because of foreclosures this year and next, they won't suffer so much as in the past. Many walkers are going to want to buy houses again some day; and when they do, lenders are going to want to make money lending them money to do so (hopefully requiring a good down payment). Investors searching for yield likely won't bypass what could be a large pool of borrowers."

Note the belief that, when markets turn around and lenders want to lend for housing, they'll overlook or adjust their credit processes for these borrowers who behaved rationally.

Ms. Gelinas sums up the situation thusly,

"Nobody is going to debtors' prison. Nobody is going to have to toil for 30 years and sacrifice their kids' future to pay off burdensome loans that they're stuck with forever because they overreached. (Even if banks and mortgage administrators pursue judgments for post-foreclosure loan balances, there's always bankruptcy as a last resort.)

As for Sen. Hillary Clinton and her proposed "moratorium on foreclosures": She may soon find that borrowers, not just lenders, are screaming to let them act within their contractual rights."

Sorry, Hill'. Guess that moratorium could get you into more trouble than just keeping your mouth shut on this issue. The specter of families in jail due to mortgage foreclosures isn't even remotely true.

I guess this goes to show what happens when a political poobah gets into her/his head to begin preaching on "solutions" to issues about which they clearly know very little. Creating more problems when a new solution isn't even necessary.

And you say you want this woman to be our next President?