Transcription:

Lawrence: When those banks that were too big to fail fell flat on their faces, they got up, dusted themselves off, with a $700B check from the government. American homeowners on the other hand, are in a similar sized hole. $700B in the hole because of bad mortgage deals with those banks, and they are out of luck.

In Sunday’s New York Times, magazine writer Roger Lowenstein proposes a solution for at least some of those bad mortgage holders. Stick it to the bank by strategically defaulting on your loan. To quote the article’s headline, walk away from your mortgage. There it is. Exclamation point and all. Lowenstein describes what he calls a new phenomenon, the strategic default.

A homeowner who is still able to make payments on a home that has negative equity defaults on the loan. Thereby transferring the loss to the bank. No renegotiating terms of the loan. Just walk away.

A strategic default is obviously frowned upon by the mortgage bankers, even though they do it all the time. Former treasury secretary Hank Paulsen tried to shame people away from the option in the early stages of the mortgage crisis.

For the homeowner, there is a significant downside. Not only are you helping to wreck property values of your neighbors, but defaulting on a home loan would obviously devastate your credit and hinder any plans you have of getting another mortgage in the future. David Corn is the Washington bureau chief of Mother Jones Magazine and columnist for PoliticsDaily.com. Welcome David.

David: Good to be with you Lawrence.

Lawrence: David, I’m a little shocked. The New York Times magazine put an article out saying walk away from your mortgage. I’m uncomfortable saying it myself. I want to make everyone understand, I’m not advocating it. I’m not suggesting it.

What am I missing here? I have friends who bought houses for $400K that are now worth $200K. They’re wondering if they should walk away. They’re working. They can still afford their payments. But they’re never going to get that $200K back, they think. I tell them they’ve got to keep making those payments. What am I missing here?

David: Let’s remember, there still is a big mortgage crisis here. 26% of houses are under water. I spoke to a big time financier this afternoon who thinks by 2010 or 2011, most homes could be under water. Now what are people to do in that situation? Obviously what the New York Times article is advocating is not for everybody. There are some people who are paying, who would take 60, 70, 80 years to get back the worth of their homes. If that’s the case, you have to ask yourself, what’s the best thing for me to do for me and my family?

Banks, corporations, they walk away from bad debts all the time. Companies declare bankruptcies. Often small businesses get the short end of the stick. They don’t get paid back, and the people who run the companies get personal assets. Their homes in the Hamptons, wherever they may be. Their second homes. Their pools. Their fancy cars. It’s only when the little guy or little gal starts talking about this that Hank Paulsen and the mortgage banking association says, wait a second. There’s a moral value at stake here. You can’t do this. This is bad.

But the deal that you and I and anybody that owns a home makes is we will pay for this property. If we don’t make our payments, you can take the property back. Any business would look at this would a very cold eye and say, is continuing the payments here still in our company’s best economic interests? And if not, they would back away.

It’s pretty simple. It’s a pretty simple calculation.

Lawrence: David, I’ve been known to slip through a stop sign once or twice without coming to a full stop.

David: Hard to believe.

Lawrence: But if everybody does that, we’re in serious trouble on the road. Do you see a tough journalistic call here for the editor of the New York Times magazine? The New York Times company to put an article out there saying, this is one of your options. Simply walk away. Because if that were to happen en masse, wouldn’t we have just an indescribable crisis out there?

David: Well, we may have the big crisis that’s still looming out there happen all in a couple of months. Now everybody is not going to do this. If people start to do this, I think the banks would get the message very fast. Right now, it’s still hard to renegotiate terms. Particularly on principal. The Obama administration put together what they called a HAMP plan to try to encourage some renegotiations, and it hasn’t been a big success out there. And the people who service the mortgages, it’s in their interest not to put this through.

You can’t deal often with the people who own the mortgages. So the system is still pretty rigged against homeowners who were sold bad mortgages that they couldn’t afford and who shouldn’t have been given in the first place. So if that’s what’s happening and people start walking away, I think the banks and the service companies will start getting the message PDQ. That they better start changing some terms and try to work this out so that they take some of the losses that they were in part responsible for.

Lawrence: So it might be the only thing, if it were to happen in large enough numbers, to get the banks’ attention, have the banks come in and say to a mortgage holder who’s $200K under water. Okay, we’re going to cut $100K, $75K, of that. We’re going to leave you $125K down. That’s the kind of thing you see that could conceivably happen if the banks started to see this develop as a phenomenon.

David: Yeah. Well we see that the political system has not responded quickly or I think vigorously enough to the situation out there. I mentioned earlier about 1 out of 4 homes. It’s going to be maybe 1 out of 2 in a year or two. And Americans, and American voters are going to be very ticked off about this. They’re going to be looking to Washington for relief. If they don’t get it, they don’t see it, they’ll start voting with their feet. And maybe if they do, the banks and the mortgage companies will start singing a different tune.