Economics is a lot like fashion: It’s not uncommon for some far-out notion to get a lot of hype and attention, for the hoity-toity to declare something ridiculous to be that moment’s “it” item. Yet just as the outfits that promenade down the catwalk bear little resemblance to what most people wear, many of these economic fashions also are scarce reflections of what’s true in the world of finance.
Remember the Tech Boom of 2000, when Economic Fashionistas declared that profits were an old paradigm that no longer counted in the tech startup world? You could see the ghosts of those statements in the light given off by the great bonfires of investor cash that the tech companies burned through on their way to oblivion.
That, of course, was followed by the ridiculous notion that we should give mortgages to anyone who wants one, regardless of income. That economic faux pas was embraced by everyone – like bell bottoms in the 1970s – as lenders lost their minds and as consumers embraced the hallucinogenic idea that available money was their ticket to guaranteed real estate riches.
We almost destroyed the economy of the entire world with that economic fashion disaster.
When fashions fall out of favor, sometimes the result is that they just fade away. But sometimes the result is a backlash, a way of striking back at the offense. You can bet that the response is likely to show as little sense as the original sin.
That’s what the mortgage crisis has spawned, an uproar from consumers who believe that they have no responsibility for their own fiscal action; who think that they are owed a guaranteed rate of return on their purchases; and who think their personal economic fashion of the day ought to look like a Miley Cyrus concert outfit – on the hook for as little as possible.
Over the past few months, university professors, consumer advocates, and even stodgy media institutions like The New York Times have been sewing together a statement of personal irresponsibility. The message is that consumers who are underwater on their mortgages – where they owe more than their home is worth – should engage in a “strategic default.” That’s the fashionable term for mailing the house keys to the bank, with a note that says, “See you later, sucker.”
Because we are in an unprecedented economic mess, lenders of all stripes are making unprecedented concessions. Short sales are at an all time high. Loan modifications are much more prevalent than they ever have been before. The length of time distressed properties sit in foreclosure has stretched to more than a year. With so many people in trouble, lenders have had to rethink how harsh they are in collecting what’s due.
That’s emboldened some to conclude that the debtor ought to be the one to decide what the debt rightly is. There is now a fashionable notion that consumers ought to be able to walk away from their obligations, with no shame and no recourse.
Last week, Fannie Mae decided that it has had enough of this nonsense. It issued a new guideline that if someone intentionally walks away from their mortgage obligation, they will not be eligible for a Fannie Mae loan for seven years. Since Fannie buys more than 70 percent of all mortgages made in this country, that’s a considerable threat.
Freddie Mac, which buys most of the remaining mortgage inventory, currently has a five year ban in place. It said it would consider adopting Fannie Mae’s more stringent rule.
It should. And, frankly, both ought to mull going even one better: making the ban a decade-long.
For true deadbeats, the new rule won’t mean much; no rule of fiscal responsibility means anything to them. But for those who are being swayed by the allure of an economically fashionable answer to their money woes, they should take note: Fashions fade quickly, miscalculations do not.
