GOPideas... ideas done right

The current Obama housing plan rewards irresponsibility by allowing individuals who accepted mortgages they could not afford and penalizing the creditors owed by the mortgage holders, as outlined here. Since the housing plan was not passed by Congress, Republicans had no opportunity to object --- but they can now, after seeing the inherent irresponsibility of it, work to pass legislation to mitigate the perverse incentives encouraged by the plan.

Specifically, the GOP should advocate for one amendment: that any reworked mortgage becomes a recourse loan and that recourse loan be enforceable by the federal government. At the end of 2008 Larry Lindsey proposed a similar idea in which the government would provide 4% mortgage to troubled homeowners in exchange for the loan becoming a recourse loan, enforced by the feds. (Lindsey's plan still contains the fundamental flaw of rewarding irresponsibility and implicitly penalizing those who did not behave irresponsibly, but it's a start.) Essentially, a recourse loan means that if a borrower stopped paying on a house, the lender could use any means necessary to get paid: wage garnishments, repossessing other assets, taking retirements accounts, etc. The plan's simplicity is beautiful: it will rapidly weed out the people know they can't pay and are waiting for a handout from those who intend on fulfilling their obligation. 

Since that time, a debate has raged: are foreclosures due to people being unwilling or unable to pay? The left would have you believe that the housing plan would help the lower and middle classes (then why does it go up to $729,000 homes?) who are fighting their best to stay in their homes. Evidence suggests otherwise. 

A great study by the Richmond Federal Reserve Bank proves that many foreclosures are by choice, not by necessity. The researchers prove this by comparing states with recourse provisions with states in which lenders can only repossess the house (non-recourse states). To be intellectually honest, while true in aggregate, houses of different values show differing propensities for defaulting.

For a property appraised at under $200,000, the probability of default is the same. However, for houses valued:

$300-500,000:             59% more likely to default in non-recourse states
$500-750,000              100% more likely to default
$750-1,000,000             66% more likely to default

In other words, when a lender cannot force someone to pay a mortgage they do not want to pay, the borrowers are significantly more likely to walk away. Although normally a lefty voice, New Republic has a good piece that further details how significant a problem walk-aways (those who walk away from their houses despite being able to pay) are.

Another concept outlined in the Fed paper is the notion of deficiency judgments --- the procedure in which a creditor attempts to recoup losses for an asset sold for less than the obligation (i.e. a house sold for less than what was owed). In recourse states (non-recourse states do not allow for deficiency judgments), lenders do have the opportunity to try and collect the debt through a deficiency judgment --- thus compelling the borrower to pay. However, state law varies drastically on how deficiency is established and adjudicated. More importantly, would a prudent lender expend considerable time and money attempting to compel someone who refused to pay their mortgage, to, well, pay them other money?

This is where Republicans should become fans of big, activist government: use the IRS, HUD, Fannie Mae and Freddie Mac to ensure that all mortgages are paid in full through repossessions of any asset (car, retirement accounts, boats) or future asset (wage garnishment) to ensure that taxpayers do not absorb losses for people who can pay their mortgage, but choose not to.

Some may argue that this is harsh. However, as someone whose net worth just recently made it into positive territory (thank you, student loans) the fact that Congress saw fit to restrict my ability to write-off student loans and medical expenses through bankruptcy, leaves me nonplussed as to the plight of homeowners with assets who walk away from their mortgage and leave taxpayers holding the bag.