Drowning the Underwater Borrower’s Rescuer

According to the International Life Saving Federation, headquartered in Belgium, about 1.2m people around the world die by drowning every year. That’s about one death every 30 seconds. About half of these are children, according to the organization, which is heartbreaking. Of the remainder, many die trying to rescue others who are drowning. Attempting to rescue a person who panics in the water is among the most dangerous tasks emergency responders face. We don’t deal with life and death issues like that in our business very often, thank God. But that doesn’t mean that people here aren’t drowning. According to some estimates, about 10% of American homeowners currently owe 25% more than their properties are worth. That’s about 11.3m homeowners who are technically under water on their mortgage loans. If you wanted to name them all over the next 12 months, you’d have to call out one name every three seconds. By the time you finish, the majority of them will have lost their homes through foreclosure or simply walked away. An underwater borrower can lose the home if they panic and don’t take steps to get their loan back on track and that can be heartbreaking. But with strategic default becoming an acceptable method of dealing with serious delinquency, the bank stands to lose even if the borrower doesn’t panic, but rather thinks things through and decides to mail in the keys. Either way, the rescuer—in this case the federal government—gets hurt. There can be no better illustration of this than the recent earnings announcement from Fannie Mae [stock FNM][/stock]. Currently in receivership and under the control of the federal government, the GSE reported yesterday that it had lost $13.1bn in the first quarter. If you were throwing dollar bills into a campfire, you’d have to chuck $1,661 into the flames every second to lose as much money in the same period of time. On the plus side, sort of, Fannie lost $23.2bn in the same period last year, so this is like an improvement. I guess. A new loan quality initiative Fannie Mae is rolling out will help, too. To keep the industry moving toward recovery, Fannie will request $8.4bn from the US Treasury Department. You don’t even want to know how fast the printing presses will have to be moving to create that amount of money or how many man-hours the Internal Revenue Service will spend collecting it from you, because that’s where its going to come from. That brings the total bailout for Fannie and Freddie Mac [stock FRE][/stock] to $145bn…so far. Now, I’m not interested in piling on with those who claim that free markets should have been allowed to deal with these problems. I don’t believe they could have. And I’m not interested in getting into any arguments with folks that aren’t up to speed on which toxic assets the GSEs bought versus the Treasury or someone else. It doesn’t really matter. All I’m wondering is will there come a time when the government realizes that strategic defaults are not the same as loss of homeownership for economic or other reasons beyond the control of the borrower? The government has spent a fair amount of resources on the idea that homes must be saved and borrowers should get assistance to stay in their homes and the current administration has been more than willing to commit public funds to the aid of industry firms that work toward these goals. All fine and good. But when it comes to a lender who cannot convince a borrower of means not to walk away from a perfectly good loan that just happens to currently have a very high LTV, I’m not sure taxpayers should share in that loss. I mean, we weren’t in line to share in any gains realized from these borrowers, at least I wasn’t. I’m all for pitching in and helping the government and the industry work through the downturn and my tax bills indicate that I’ve been doing my share. I’m just not interested in drowning myself because other borrowers have decided they can walk away from a contract. Perhaps the industry should segment these borrowers and take a different tack with those who walk away.

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