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WaPo Constructs Morality Play of Homeowners, Instead of Mortgage Lenders

Brady Dennis of the Washington Post brings up the spectre of moral hazard on the part of homeowners, who may not pay for their loans if they see the turmoil in the housing market and the inability of servicers to foreclose.

This is one of the unintended consequences of the spreading foreclosure freeze. Although there are no statistics on how many homeowners are taking advantage of a foreclosure moratorium to avoid making monthly payments, some economists warn that this practice could become more common if a national freeze is put in place, as some lawmakers seek.

This is called a “moral hazard” – the notion that borrowers might decide to stop paying back what they owe or continue to withhold payment because they see no repercussions.

To back this up, Dennis introduces all of one person – a Floridian who initially tried to keep up with his payments despite a recast interest rate and plummeting home price.

I’ve actually talked to people at NACA, the massive loan modification fair. I’ve corresponded with plenty of people trying to get HAMP modifications. Obviously there’s a selection bias there, because these people want to get an affordable payment. But they almost universally said that they view that mortgage payment as sacred – in fact, many of them were current at the expense of food or utilities. Their pride of ownership very clearly showed through. So the banks really don’t have to worry about this on a mass scale; Americans by and large want to pay their bills.

The other side of this is why it should be seen as guilty to live in a free house, but not guilty to supply false documents and forgeries to kick someone out of that house. Let’s not pretend that anyone is somehow on the moral high ground here, or that only borrowers have moral hazard and not the banks who got a no-strings bailout two years ago. The servicers, subject to an Obama Administration probe, have been found to exhibit the same kind of “wide variation” in quality and competence as any other part of this country.

A four-month-long Obama administration probe into five of the country’s largest mortgage servicers has discovered “a significant variation” among their operations, with some servicers “significantly worse than others” in how they handle home loans, U.S. Secretary of Housing and Urban Development Shaun Donovan said in an interview.

Mr. Donovan wouldn’t identify which companies were laggards in the HUD review, but he said the administration plans to make the results of its investigation public in the next few weeks […]

Mr. Donovan said the issues discovered by his agency’s review go beyond the technicalities of foreclosures.

“The issues that we’ve seen around the affidavit process are potentially symptomatic of problems in other parts of the process as well, and we want to make sure that we are reviewing more broadly” how the industry operates, he said.

The servicers haven’t done their job either. They didn’t originate and underwrite the loans properly, they didn’t package the loans to investors properly, they didn’t modify loans for borrowers in trouble properly, and they didn’t foreclose properly. The “moral hazard” for borrowers is entirely of the doing of the servicers – if they were doing their job, nobody would be able to stay in their homes for an elongated period without paying.

I’m not going to give in to the one-sided morality play at work here.

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David Dayen

David Dayen