June 14, 2010
Dean Baker
Truthout, June 14, 2010
See article on original website
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 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 non-recourse 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 re-selling 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 whose value 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.
The impact of this bill, even if it goes into law, is likely to be primarily symbolic. There is no easy way for the FHA to determine if a default was strategic. However, this does show clearly the Republicans contempt for the free market and the sanctity of contract: principles that many of them purport to hold dear.
After all, banks presumably understood the risk of default when they issued the mortgage. They understood that house prices could drop giving homeowners an incentive to default. The banks should have incorporated this risk into the interest rate they charged on the loan.
Now that the risk is turning many mortgages into bad bets for the banks, the Republicans want to re-write the rules to the benefit of the banks. Are we to believe that the boys and girls at Citigroup and J.P. Morgan didn’t understand the terms of the mortgages they were issuing? Do the CEOs of these huge banks need a government bureaucrat to hold their hands and explain the terms of these mortgages to them so that the banks understand the risks they face when they issue a mortgage?
This is not the only case where the government is actively interfering in the market to help big corporations. Many of us were struck to discover that BP faces a liability cap of $75 million from its oil spill. This means that the government has given BP the right to do tens of billions of damage to people’s property, livelihood, and lives and walk away with a tab of just $75 million. In what world is this a “free market”?
There is a similar liability cap for the nuclear industry. The Price-Anderson Act limits the liability from an accident to $12 billion. This means that people will not be compensated for any damage that a nuclear accident causes in excess of this amount, unless they get the taxpayers to foot the bill.
Again, where is the free market here? For those who think that nuclear power is a safe and clean form of energy, why not let the industry just buy insurance on the market like any other industry? If the market won’t provide insurance at an affordable rate, is there some reason that the government should step in and make an otherwise unprofitable industry commercially viable.
There are endless more examples of the government actively intervening in markets on the side of the rich and powerful. This is not a surprise to those who follow politics. The only surprising part is that somehow those who routinely support such interventions can get labeled as advocates of the “free market.”
This is not just their own labeling. Progressives routinely denounce their right-wing opponents as “free market fundamentalists.”
It is absolutely baffling why progressives would help the right clothe policies whose only unifying theme is that they serve the interest of the wealthy as a principled commitment to the market. A principled commitment to the market is a view that has appeal to a broad segment of the population. The real priority of the right – a commitment to serve the interests of the rich and powerful – will only appeal to the rich and powerful.
Progressives have to stop doing propaganda service for the right. There are no free market fundamentalists here; everyone recognizes the need for a big role for government in the economy. The debate is over whether we want the government to serve the needs of the bulk of the population or just the purposes of the rich and powerful. Progressives must stop helping the right hide its real agenda.
