Sometimes a simple computation can shed more light on things than sophisticated thinking. Sometimes it can't. Take this example, from a recent paper of Brent White: Somebody comes to you and tells you that a simple change in what you do---that won't affect your lifestyle much---will save you about $2000/mo., which is the difference between being able to retire one day and not. Most people would do that, right?
As it turns out, usually they won't, which is the point of the paper Underwater and Not Walking Away linked above. Usually they will just bust instead. From this point of view, it's pretty clear why HAMP is not working very well and has an atrocious conversion rate on it's "trial mods".
Policy makers are faced with what is, essentially, a straightforward problem: people paid too much for houses and lost a lot of money. And a bunch of them did it using Meriwether-esque gearing.
The did this for various complicated reasons, including the by-now well-known borderline fraud from house salesmen and lenders. However, the good news for most borrowers is that they aren't on the hook for much beyond moving.
White gives some details:
While the actual financial cost of having a poor credit score for a few years may be hard to quantify, it is not likely to be significant for most individuals – especially not when compared to the savings from walking away from a seriously underwater mortgage. While a good credit score might save an average person ten of thousands of dollars over the course of a lifetime, a few years of poor credit shouldn’t cost more than few thousand dollars. Moreover, one who plans to strategically default can take steps to minimize even this marginal cost. For example, one could purchase a new vehicle, secure a new home to rent, or even purchase a new house before beginning the process of defaulting on one’s mortgage. Most individuals should be able to plan in advance for a few years of limited credit.
Policy makers who want to slow down foreclosures have one obvious recourse: make it less attractive to be foreclosed on. The usual proposals are some combination of:
- Reduce the total losses somehow via a "cramdown".
- Reduce the total losses via reinflating the house price bubble.
- Make locking in a huge loss more attractive by reducing monthly payments.
- Use shame and other modes of social control to convince borrowers to abandon standard commercial reasoning.
In my two previous diaries (here and here), I've discussed the attempts at the 2nd and 3rd strategies in the list above. HAMP, in particular, seems to be based on some elegant theoretical work from economists at the Boston Fed.
The problem is that the bubble isn't coming back, and HAMP is blind to the large magnitude of losses, so it can't deal with rising unemployment or borrowers who have been wiped out by their negative equity. The point of White's paper is that when Marx failed them, policy makers decided to try Foucault instead. Here's White again:
The clear message to American homeowners from nearly all fronts is that one has a moral responsibility to pay one’s mortgage. The message is conveyed not only by political, social, and economic institutions, but by the majority of Americans who believe that voluntarily defaulting on a mortgage is immoral. At the political level, government spokespersons, including President Obama, have repeatedly emphasized the virtue of homeowners who have acted “responsibly” in “making their payments each month” and have lamented the erosion of “our common values” by, for example, those who irresponsibly borrowed beyond their means. The worst criticism has been reserved, however, for those who would walk away from mortgages that they can afford. Typical of such criticism is that of Secretary of the Treasury Henry Paulson, who declared in a televised speech: “And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations.”
It's not only politicians:
Moreover, a homeowner who turned to any number of credit counseling agencies would also find little sympathy - and much moralizing - should they announce their plan to walk on their “affordable” mortgage. Gail Cunningham of the National Foundation for Credit Counseling declared for example in an interview on NPR: “Walking away from one's home should be the absolute last resort. However desperate a situation might become for a homeowner, that does not relieve us of our responsibilities."133
White highlights how the normative discourse surrounding foreclosure creates and asymmetry between borrowers, who are told to act morally, and lenders, who are going to act commercially no matter what. He has a number of suggestions about how to even things out, one of the more interesting of which is to prevent mortgage defaults from being reported on credit scores:
Preventing lenders from reporting mortgage defaults to credit rating agencies would, as a practical matter, eliminate lenders’ ability to hold borrowers’ human worth as collateral. Such a change would also serve as an important signal from the government – sending the message that a borrower who exercises a contractual right to default should not be viewed as immoral or irresponsible. It would thus help considerably in leveling the playing field between lenders and borrowers.
This seems like a good idea to me. What do you think?
In any event, the official HAMP numbers will be out soon, so we'll get to see whether this particularly post-modern program succeeds on its own terms.