The principal of the thing: Part 2, keeping their interest
[Continued from yesterday's Part 1.]
Yesterday we showed that, despite what a recent New York Times article would have you believe, refusal to agree on unilateral cuts of mortgage principal owed by homeowners whose houses may be worth less than those loans isn’t stubbornness by a single individual but is rather endemic to all government lenders. Next we have to rebut the claim, proffered with emotion as a substitute for logic or evidence, that somehow this is self-evidently a good thing to do.
By definition, these are people not defrauded. (Had they been defrauded, they have multiple avenues of appeal.) These are people who apparently thought a loan gave them upside from house appreciation, and no downside. Worse, some of them may have been encouraged, after the fact, just to default on their loans when it was inconvenient to make the payments, because surely the lenders would renegotiate.
I doubt it, and don’t call me Shirley
Last week the inspector general of the Federal Housing Finance Agency said that Freddie Mac had not pursued Bank of America aggressively for compensation for bad loans, despite warnings from a senior staff member.
As I showed yesterday, the Times author is having fun with sophistry. Watch this nice rhetorical Texas two-step.
You put your logic here, and your story there …
First, confuse the issue. Going after Bank of America on behalf of Freddie Mac has nothing to do with whether Freddie Mac should let borrowers cancel some of the principal they owe. Or maybe the author believes that since a sideline critic thinks Freddie Mac wasn’t zealous in pursuing collections from one source, it should be similar lazy in pursuing them from all?
I didn’t feel like chasing them, but I’ll feel like chasing you
Second, create a false textual inference by giving an immediately following quote that is not by the unnamed FHFA official referenced.
“It’s sinful, is the word I would use, that they won’t do this,” said John Taylor, president of the National Community Reinvestment Corporation, referring to debt forgiveness.
(The author is indeed stuck here, having to add the clarifying clause ‘referring to debt forgiveness’ since an ordinary reading would interpret ‘this’ as meaning ‘going after Bank of America.’)
“And the only reason they won’t is they don’t want to realize the red ink that’s already on their books.”
Again, this is Mr. Taylor speaking, and as mentioned above there are many other plausible reasons why Fannie, Freddie, FHA, and VA would reject a policy of principal cancellation. Once you breach the principal amount of a loan based on a projected resale value – not the use value or occupancy value or even the most basic, whether the borrower can make the payments – where do you stop?
Damned if I know
Large lenders have long resisted debt forgiveness because of fears that it creates a moral hazard, meaning it could encourage borrowers [a] to take out risky loans in the future because the consequences would not be so bad, or [b] to default to qualify for principal reduction.
[a] is a distant risk, but [b] is an immediate one. If you saw your neighbor defaulting because he said his property was worth less than his loan, wouldn’t you feel like a total chump if you didn’t?
They argue that other types of loan modifications achieve the same goal.
That’s not an ‘argument’, subject to political disagreement, it’s an empirical and financial fact. If the goal is to provide borrowers with motivation to keep paying, then the lender can offer contingent future relief, or even concurrent relief, provided the borrower keeps making payments. As against that, a cut in principal gives away money based on an abstract (what the home would be worth if sold) that is counterfactual (the homeowner does not want or intend to sell it), and it’s action by the lender now, not the borrower. It reverses who should be proving trustworthiness to whom.
Proponents of debt forgiveness argue –
Naturally people who want something that helps them will be eager to provide reasons why what helps them will help whom they’re asking.
Please help me help you!
Proponents of debt forgiveness say that forbearance does little to increase a borrower’s willingness to pay.
Oh? And is there evidence of this?
As much as there is for the flying spaghetti monster theory of creation!
“The banks are trying to shoehorn an affordability fix into a negative equity problem,” said Frank Pallotta, a managing partner of the Loan Value Group, which runs the homeowner incentive program used by PMI.
Mr. Pallotta isn’t a PMI employee, he’s a servicer under contract, so his interpretations of bank actions are just that, and it is to be expected that his explanation may be overly simple.
“About 35% of all defaults are at least in part strategic,” he said [Curious; an article he wrote earlier this year says 20% -- Ed.], meaning that even if a financial mishap like job loss is behind a homeowner’s decision to stop paying, being underwater is a factor.
Either Mr. Pallotta or the Times author is missing a crucial difference: unlike securities investments, which are purely financial in nature, homes are the personal financial asset you live in. So people don’t view them as an easy walkaway, because to stop paying is to face eviction and works.
About one in five homeowners with a mortgage is underwater [Says LVG – Ed.], and the total amount of negative equity is estimated at $700 billion to $800 billion.
Fortunately for everyone involved, equity is not the sole criterion. Mortgage debt service is rent you pay to yourself for the privilege of living in the home you’ve borrowed money to buy.
While many of those borrowers are coping with self-inflicted wounds –
Hey, it could happen to anybody!
An interesting throwaway – consigning millions of people’s misbehavior to a casual phrase.
Your own misbehavior led you to this
– the problem is not limited to subprime loans.
More rhetorical games. Although the evidence is overwhelming that it was subprime lenders and originators whose runaway credit extension triggered this mess, the author now seeks to tie the GSEs into the problem, even though they weren’t subprime (except for idiotically buying mountains of existing debt at exactly the wrong time).
Fannie/ Freddie didn’t write all the blue stuff that went bad
Among mortgages backed by Fannie and Freddie, a vast majority of which are prime [In other words, references to subprime are a diversion – Ed.], the percentage of underwater homeowners is virtually the same as the percentage among all mortgages.
That finding defies financial logic – so some piece of evidence or context must be missing. Maybe the underwater percentage reflects only the non-foreclosed inventory, and the subprime inventory has already gone through many more foreclosures.
[Concluded tomorrow in Part 3.]