Government Spending

Jingle Mail Jangles Nerves

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The face of strategic default.

Is there really a plague of strategic mortgage defaults poised to ravage what's left of America?

Beantown's own David A. Smith says strategic default is just "a myth seeking anecdotes" and hips us to his fisking of a recent jinglemail jeremiad in City Journal.

Smith, writing for the Affordable Housing Institute ("Developing Affordable Housing Ecosystems World Wide"), scores some good points against economist Luigi Zingales. His post, a sort of photo-text proem, has some of the disjointed pleasure of high modernist experimental writing. Smith notes that one of the big pieces of evidence Zingales uses is actually a measure of sentiment about strategic default by others, not first-person evidence of the phenomenon.

He's on less sure ground with this blanket assertion about causes of default:

Most people default because they have payment problems, not because they theoretically believe their home to be worth less than its value.

This is at odds with data from the Federal Housing Finance Agency and a private analyst, who conclude that negative equity is the largest single determinant of default probability.

Smith is very shrewd about how your perception of jingle mailing is colored by your own prejudices against your friends and neighbors. But I can say for certain -- not through reified rumor but having walked people through the catechism -- that I know at least five strategic defaulters. These are people of my own class: cosmopolitan ignoreducated morally vacuous coastal parasites. I love them. But the fact is they have chosen to stop paying their mortgages even though they could -- in some cases only through radical lifestyle reductions -- continue to pay.

A message more people need to hear.

Where I differ from Zingales, and probably from Smith, is that I don't think this will "undermine our financial system" or destroy some "social norm." Default undermines a bank's balance sheet and a borrower's credit record, as it should. It also allows both parties to get out of a bad situation and on with their lives.

Like all the best high modernist experimental writers, Smith ends up calling for a holocaust. "People have an enormous capacity to conclude that anything goes if 'it's not my fault,'" he writes, "and the observant herd will rapidly notice if defaulters are not dismembered."

Well, we have several years' worth of evidence, and by this point it's pretty clear that the consequences of going deadbeat are less than life threatening. You get to stay in the house rent-free indefinitely while the bank ignores your phone calls. Eventually you have to find a rental place and move out. Your credit rating goes down. And you're done. It's about as painless a solution as you can imagine.

Yet with 24 percent of mortgages underwater nationwide, the actual delinquency rate hovered around 10 percent after the 2008 credit unwind, and it is now at 9.85 percent, according the Mortgage Bankers Association.

Nevertheless, Zingales is so humid about the possibility that that second number might creep up that he suggests the following:

We envision a reform of the bankruptcy code that, in areas where house prices have dropped precipitously, would require lenders to give homeowners the option of resetting their mortgages to the current value of their houses. In exchange, the lenders would get 50 percent of the houses' future appreciation. To keep homeowners honest—that is, to prevent them from doing minimal upkeep in the knowledge that they stood to gain less from a home-price increase—the capital gain would be measured based on an average of houses selling in the area, rather than on the change in the value of the actual house.

Now how's that for undermining social norms? (And by the way, how come I never get consulted when they're making up these social norms?) You signed a contract in which the terms of failure were clearly explained. But instead of letting the contract go bad the way our ancestors designed, government apparatchiks and policy wonks are now going to force you and the bank into a whole new deal that requires the bank to take a direct financial hit in exchange for a future-value pig in a poke, while you get chained, company-store-style, to a house you no longer wish to pay for.

Why are farkakte solutions like this even being considered? The government has been trying to solve the jingle mail problem for almost three years now. It has borrowed and spent hundreds of billions of dollars trying to keep people in their borrowed homes. And it has achieved nothing except to drag out the problem. If Obushma had allowed nature to take its course we'd already be on the other side of the real estate correction. Strategic default happens. But the first step toward sobriety is to admit we don't have a problem.