Tuesday, June 15, 2010

"Free-Market Fundamentalism" Is an Invention of Progressives

by Dean Baker

(Image: Jared Rodriguez / t r u t h o u t; Adapted: sirenbrian, nep)

The right showed once again that they have no allegiance whatsoever to the free market when House Republicans pushed through a bill that would prohibit the Federal Housing Authority (FHA) from insuring the mortgage of anyone who had "strategically defaulted" on an earlier mortgage. The intention was to punish people who had taken advantage of this option and, therefore, make it less likely that others would go this route in the future.

A strategic default is when a person stops paying a mortgage even when they can still afford it, and, instead, turns the house back to the lender. This can be a desirable move for borrowers if the price of the house has fallen below the value of the home due to the collapse of the housing bubble.

In many states, a mortgage is a nonrecourse loan. This means that, under the terms of the contract, the return of the home ends any commitment to the lender. Even in states where the loan is a recourse loan, it is unusual for lenders to pursue actions against borrowers after a foreclosure, even if they have not recovered the full amount of the mortgage by reselling the house.

For these reasons, a strategic default can often be a good option for homeowners. In fact, strategic default is a standard business practice. Businesses often default on a mortgage and turn the property back to the lender when they decide that this is the more profitable route to follow. For example, Morgan Stanley recently went this route with five office buildings in San Francisco, the value of which was considerably less than the outstanding mortgage.

But Republicans in Congress aren't interested in leaving things to the market. They were concerned that too many homeowners were acting in their own best interest and, thereby, hurting the banks. So, they decided to have Big Government step in and create an additional sanction for homeowners who strategically default.


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