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Paul Kiesel
Paul Kiesel
Contributor •

Henry Paulson and the Curious Case of the Flurry of Foreclosures

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Henry Paulson might be as confused as the average American
when it comes to the subprime mortgage crisis. Testifying in front of a
house-panel a month ago, Mr. Paulson said, “[. . .] let me emphasize, any
homeowner who can afford his mortgage payment but chooses to walk away from an
underwater property is simply a speculator – and one who is not honoring his
obligations.” Okay, that makes sense. If you can afford your mortgage payment,
whether or not the home has lost some value (i.e. underwater mortgage), then
you should be able to continue making your payment. But Mr. Paulson is
implicitly stating that all
homeowners need to “honor their obligations,” as he makes the generalization
that anybody walking away from an
underwater mortgage is “simply a speculator.” He also makes a point to say that
by walking away from one’s mortgage, or thousands of people walking away from
their mortgages, is dangerous to the economy and that people should continue
making payments for the good of the economy. However, if Mr. Paulson wants to
get into the subject matter of “honoring obligations,” then why do subprime
borrowers, who were finagled into negative amortization loans and can no longer
make payments on loans that have reset, have to honor Mr. Paulson’s “good for
the economy” rhetoric, while the lenders and re-packagers of these loans get a
pass and government bailouts worth billions of dollars?  

What Mr. Paulson doesn’t get or, maybe, just doesn’t want to
admit, is that the people who have been taken advantage of in this mortgage
mess have the power, collectively, to just walk away. Mortgagees of
fraudulently written loans can make the most profound difference, by just
deciding to hand the keys to their homes back to the banks that originated the
loans (or bought the loans from a bank that originated the loans). Mr. Paulson
and many other players on Wall Street do not want to see this occur. But they
also have to be cognitive of this outcome as a possibility that could come to
fruition very soon, particularly if Mr. Paulson is making statements that
connect walking away from one’s home as a detriment to the health of the
economy. 

On Slate.com this afternoon, a very pointed article was
written on the next wave of impending foreclosures and the group of people who
will be walking away from their homes: prime borrowers. The article also points
out that fairly soon walking away from one’s home, without any attempt by the
government or the lender to adjust the loan and/or payment, will make the most
sense, regardless if it’s good for the economy. Why is anyone going to want to stay
in a home that is causing so much grief, in order to help the economy and the
government, a government that appears to be blasé in wanting to assist the
homeowner? Most troubled mortgagees, once they realize the logic in the
equation, will likely walk away from their homes, and the government and Wall
Street will be wishing they had been coming up with better preventative
measures, than the most recent “Big Business” friendly bill, the “Foreclosure Prevention,” which would provide billions of dollars in tax breaks for automakers,
airlines, alternative energy producers, and other struggling industries that
stretch well past the letter “A.”