PERSON OF THE WEEK: One of the most controversial aspects of today's mortgage banking industry is the rising number of strategic defaults. While originators and servicers are not pleased with this development, there are advocates that openly urge distressed homeowners to consider and pursue a strategic default game plan. This week, MortgageOrb.com speaks with one of the most vocal proponents of strategic defaults: Karen DeCoster, CPA, a special advisor on economics for the Clare Boothe Luce Policy Institute and a prolific blogger for libertarian-oriented Web sites.
Q: Many individuals in the federal government and the mortgage banking industry are trying to dissuade borrowers from pursuing strategic defaults – and, sometimes, they try to use a guilt trip approach to keeping people in their homes. Is it possible to successfully shame these people into staying in their mortgages and not walk away from their loans and homes?
DeCoster: Federal officials like former Treasury Secretary Henry Paulson, along with powerful special interests that profit from central planning policies, have an interest in keeping people hogtied to the sinking housing market. They are trying to depict struggling Americans as irresponsible scoundrels who are recklessly walking away from their commitments.
In fact, the multi-millionaire Paulson, who was one of the architects of the Wall Street bailout, told the Wall Street Journal that borrowers ‘have a responsibility to keep paying.’ That's a pretty broad statement to make that ignores the default option on the typical mortgage contract and disregards each homeowner's unique options and financial situation.
The broad statement was intentional. The overall scheme calls for treating each individual debtor as one piece of a collective pool of citizens who shall be enslaved by the collapsing economy. The people who insisted, for years, that there was no housing bubble, no debt dilemma and no recession on the horizon are the same people who are now telling us that everything is fixed, the recession is over, and therefore, we should go back to our old habits – buy more stuff we don't need, take out more loans, and buy houses and cars.
Q: But how would you respond to the efforts that are being made to work with borrowers who are facing acute financial difficulties?
DeCoster: The Obama administration, in its massive campaign to socially engineer America, is pressuring banks into renegotiating mortgage payments in order to keep people captive in their mortgages. The goal of the elites in power is to keep up the appearance of prosperity and keep folks in debt to the big banks. Mass walkouts will injure Washington D.C.'s favorite constituency: Wall Street.
Additionally, there's John Courson, who runs all over the country trying to spread the moral message to middle-class people who are pawns in this mess. Courson is the chief executive of the Mortgage Bankers Association, so whose interests do you think he is representing? Courson advising homeowners on their moral and financial strategies is like a crocodile telling the neighborhood children they should take a shortcut home through the swamp.
These so-called ‘leaders,’ unfortunately, have the necessary wealth, political power and media access that enable them to introduce their disingenuous platform and influence the masses. For those who aren't empowered by the political establishment, there's no equal opportunity for commanding the public stage.
That's why those folks [in financial difficulty] need to reach out to a local certified public accountant or other financial advisor they can trust. Furthermore, they need to tune out the moralizing that flows from the fat cats and special interests that get wealthy by keeping them equity deficient.
Q: Still, this is an emotional issue for many borrowers. No one wants to lose his or her home. What is your response to this heartstring tug?
DeCoster: The condemnation of homeowner defaults is brought on by a knee-jerk, emotive response. People feel – they don't think. You can thank public schools for teaching self esteem and groupthink, as opposed to business and analytical/critical thinking skills. Welcome to the Oprahized nation where logic and reason are abandoned in favor of emotionalizing hot-button issues for the purpose of ‘feeling better.’
An individual's financial options can be objectively assessed, and the most favorable course of action can generally be determined. Business entrepreneurs and managers are constantly analyzing and estimating various strategies, and that is how businesses become enduring and profitable. Individuals and households are no different in terms of planning best-course scenarios and minimizing waste and losses.
Except, individuals and households suffer personally and emotionally by bearing an unfavorable financial condition. For that reason, they must take actions to alleviate uncertainty and keep their financial house in order.
Q: But here in the mortgage banking industry, homeownership has been promoted for decades as the American dream. Was that wrong?
DeCoster: This notion began when central planners and social engineers misappropriated the term ‘the American dream’ and put it into use as a slogan to convey a sense of entitlement and equality as they began to shape and subsidize the homeownership nation – that got started with the creation of Fannie Mae in 1938. James Truslow Adams coined the term ‘American dream’ in his 1931 book, ‘The Epic of America,’ to describe his ideal social order based on one's capabilities and merit.
During the bubble-boom years, the term ‘American dream’ came to be defined as a McMansion for everyone with promises of perpetually rising values. This turns every homeowner into an instant entrepreneur, as opposed to a sap who gets ripped off by overpaying for a durable good he can't afford.
Q: Then how do you define homeownership?
DeCoster: A home is not an investment – it is a durable consumer good. If it were an investment, it wouldn't be the primary family shelter. This is a dangerous perception that has been hammered into the American culture, and this way of thinking will end in disillusionment.
Why do folks want to see housing prices go up when that means they pay more for housing? Because of the ‘investment’ mentality – they want to see their investment rise in value, even while they pay higher prices for someone else's investment. Does that make sense? No, but it makes homeowners feel more prosperous in the end.
It's important to remember that for each individual, there is an objective financial analysis that can calculate the costs of various alternatives. That analysis determines whether a homeowner is better off staying in the home or leaving the home and becoming a renter.
Furthermore, there are qualitative factors to consider that are subjective to the homeowner. I think the attachment to homeownership will have people putting a heavy emphasis on those qualitative factors. Since walking away from a home is a huge lifestyle change, staying in the current home will be the most uncomplicated choice for many people.
Consequently, many homeowners will remain in their homes unless they can no longer make the payment. They will dig in their heels and ride out what they think is a temporary storm while claiming the moral high ground. There is also the perception that it is somehow ‘superior’ to own a home as opposed to renting something similar, even if ownership keeps in you in a financially inferior condition.
Q: Can a cogent argument be made that strategic defaults are good for the economy?
DeCoster: Looking at the statistics on upside-down mortgages, there should be far more strategic defaults above and beyond what is occurring. According to Deutsche Bank Securities, about 21 million U.S. households will be underwater on their mortgages by the end of this year. Plus, between 2010 and 2012, more adjustable-rate mortgage resets will drive payments higher, making ownership even less desirable.
In reality, strategic defaults will help drive housing prices back down to market values. If the economic/monetary policy planners within the government would abandon their efforts to keep interest rates low, and if they stop pushing more debt onto American consumers by lying to them about the future of housing and the economy, then perhaps the correction will be able to occur, and the overpriced assets – houses – can be cleansed from the market.
Shedding debt and overpriced housing will help clear the way for economic recovery. Talk about a real stimulus!