House Going After Strategic Defaulters

Annie Lowrey writes about efforts underway in the House of Representatives to penalize those who “strategically default” on their home mortgages. I note as background something that others have pointed out before: In a business context, this whole issue is viewed different. If a firm is paying interest on a loan in a situation where it would be more profitable to simply suffer the consequences of default (reduced future borrowing ability, etc.) the firm’s managers are seen as having a responsibility to do the right thing for their shareholders’ interests. Just on a prima facie level, it seems to me that the same reasoning should apply to households. Resources are best allocated across society when firms and households alike make maximizing financial decisions.

Beyond that, I agree with Lowrey that “[t]here are better ways to deal with this problem than to have the FHA attempt to identify and punish strategic defaulters, particularly if Congress does nothing to ameliorate the underlying issue of homeowners being underwater on their mortgages.” There’s just always been a desperate need for an orderly legal process whereby the value of homes and the value of home loans can be systematically written down (“cramdowns” is the lingo) in response to the system-wide re-estimation of what real estate is worth. Failing to do this is, among other things, introducing a large amount of geographic rigidity into the labor market. We need some people to move away from the worst-afflicted areas and migrate to places where there are more opportunities. People who can’t afford to sell their houses are basically “stuck in place,” disproportionately in the very places where it’s hardest to find jobs.