Photographer: David Calvert/Bloomberg

The tracks in the Nevada snow? Underwater homeowners walking away from their homes.

Just as the housing market has started to turn up, Fanne Mae and Freddie Mac, the housing guarantee agencies are loosening the rules on homeowners walking away from their mortgages. It used to be that only way to get out of a mortgage was to stop paying and let it go into foreclosure. Now, as Bloomberg’s Kathleen Howley reported yesterday, a few homeowners will be able to walk away from underwater properties, with new policies going into effect in March.

Under the old rules, homeowners who kept up with payments were effectively punished for doing so: stuck in houses worth much less than they paid, they were nonetheless ineligible for foreclosure aid programs. The revised rules give those folks a break — although with a raft of restrictions. They apply only to homeowners faced with hardships such as illness or job changes, and then only if 55 percent of their income goes to debt payments. And in some cases they’ll be asked to pay part of what they owe.

In return, the agencies will not try to collect a “deficiency judgement,” pursuing home owners for the remaining debt. That small accommodation elicits indignation from commentators. As one puts it in Howley’s story, “It’s an extraordinarily generous approach for companies still in debt to the American public.”

Actually, it’s not. In an audit released last October the Federal Housing Finance Agency found that in 2011 Fannie and Freddie pursued deficiency judgements on 35,231 accounts (for comparison, they foreclosed on about 342,000 properties). The total recovery on those accounts was $4.7 million — just $133 for each deficiency, or 0.22 percent of what the agencies were owed. The money Fannie and Freddie get back in the typical case is so small that even a token payment homeowners make as part of a deal is likely to exceed it.

It’s well known that some “non-recourse” states, like Nevada and California, bar deficiency judgements in many cases. Less well understood is that even in cases where they are theoretically possible, the judicial procedure makes them impractical.

The deficiency judgement is a club held over the heads of debtors, a scare tactic far more useful in persuading debtors that they should keep making payments than in recovering money when they don’t. Nonetheless, the idea that homeowners might not be pursued for the money they continue to owe still creates outrage among those who believe it violates the moral principle that debts should be paid.

That outrage has been with us since the early days of the mortgage bust, with guardians of public morals decrying the dangers of letting deadbeats walk away from their loans. Sometimes that’s been accompanied by nostalgic claims that upstanding Americans of the past would never have simply walked away from their debts (not true: even the term “walkaway” dates at least as far back as 1962).

Leave aside that the reason deficiency judgements are so hard to collect in the first place is that states made it that way to avoid (obviously without success) the lending excess of past land booms. Worth asking here is what the deadweight loss to the economy has been of scorched earth efforts to squeeze the last bits of money from foreclosures. Homeowners already sinking into a debt trap end up letting utilities get turned off or cars break down, while options like moving to regions with better job prospects disappear.

So more debtors are pushed to seek direct or indirect support from the government, and ultimately the costs of that can easily a few extra months of house payments or the $133 recovered in a deficiency case. Having gotten $187 billion in taxpayer bailouts, it seems reasonable for Fannie and Freddie to take that cost into account, too.

Photographer Will Wintercross/Bloomberg News

Dangerous as they can be, prop traders weren't the gorillas who beat up Wall Street.

Bloomberg’s Max Abelson today reports on Goldman Sachs’s Multi-Strategy Investing unit — in effect a hedge fund within the bank that bypasses the Volcker rule’s limits on proprietary trading. It’s a great story. It also raises a question: Is prop trading really the problem with Wall Street?

Before you answer, remember what caused the collapse of Bear Stearns Cos. and Lehman Brothers Holdings during the financial crisis, as well as the massive losses at Merrill Lynch and other banks. Obviously all of them took stupid risks with their own capital. It’s just that the risks didn’t come from the sort of trading the Volcker rule addresses.

An excellent succinct discussion of the pattern comes in Jake Bernstein and Jesse Eisinger’s 2010 Pro Publica article about the huge mortgage losses at Merrill, now part of Bank of America Corp. Merrill’s loss came from CDOs that the bank itself had packaged from mortgage-backed bonds. As Bernstein and Eisinger make clear, Merrill’s mortgage traders were the buyers of last resort for derivatives that Merrill bankers had created and no one else wanted.

That’s not the proprietary trading that regulators fear. If anything, it’s the opposite. Instead of letting traders freely choose their own investments, Merrill, like Bear and Lehman, had them stuff their portfolios with the mortgage bonds and CDOs that came out of the bank’s own underwriting and derivatives business.

In their Atlantic cover story this month, Eisinger and Frank Partnoy take apart bank income statements and focus on hat kind of risk with a discussion of “customer accommodation” trading, dryly pointing out that

“at many large banks, customer accommodation can be a euphemism for “massive derivatives bets.”

If banks want to disguise proprietary trading as “hedging,” it’s easy enough for them to do it. Maybe worse, if they want to build up massively risky positions in the service of banking fees, as they did with mortgage bonds, they can do that too. No variant of the Volcker rule stops them.

Before the mortgage meltdown, it was feared that a big hedge fund (like Long Term Capital Management) or a bank prop trader could set off a chain of dominoes that took down the financial system. The Volcker rule responds to the fear, and it’s a legitimate one. It’s just not the crisis that actually happened.

Photo: Hasbro Inc.'s Monopoly: Here & Now edition. Hunter Public Relations via Bloomberg News.

Game theory sheds light on the fiscal cliff battle.

Markets are way up today on the news of the budget deal, as everyone breathes a sigh of relief that we’ve averted big tax hikes and indiscriminate cuts to federal programs. The bad news: there’s still plenty of opportunity for a budget disaster as Congress takes up the debt ceiling and other issues in the next months.

A great number of pixels have already been spilled, and are yet to be spilled, about the economic and political implications here. Instead of adding to this storm of analysis, it’s easier to focus on an element here that’s relevant to both markets and politics: the interplay of incentives and game theory.

In the House of Representatives the vote on the budget measure was 257-161, with Democrats providing most of the votes to get it passed. House Republicans voted 151-85 against the measure. This outcome–a budget compromise backed by the Republican leadership passing over the objection of most GOP house members–is not one many would have predicted.

From a game theory standpoint, however, it looks like an excellent deal for Republicans. As the New York Times‘ Nate Silver has pointed out, the objectives of the national party on the budget differ from that of many rank-and-file members, who fear attacks from the right. This deal satisfies both constituencies. It lets most House Republicans make a stand for budget cuts without actually producing the cuts (is anyone really eager to cut Medicare reimbursement 27 percent across the board?), or opening the party to accusations of torpedoing the economy.

So despite 151 Republicans voting against the measure, it’s not clear yet whether what we’ve got is an ingenious feint, or a genuine revolt of the rank-and-file against the House Republican leadership. We’ll have an important data point on this soon enough. If John Boehner keeps his job as Speaker of the House in the incoming 113th Congress, which still appears likely, we’ll have an indication that many of those 151 Republicans tacitly support the deal they voted against. If he doesn’t then it’s a sign that there’s a bona fide revolt, and that the next months could be even more rancorous than the last.

PS: Lots of other folks have tried to play out the incentives in the fiscal cliff debate, from academics to the New Yorker‘s John Cassidy. It looks now like what most of the analysis missed was that this wasn’t a two player contest, but one with several parties (the Democratic administration, the national GOP, Tea Party-backed House Republicans) aiming at somewhat different outcomes.

Update, Jan. 3: Boehner was indeed re-elected Speaker–with the votes of 220 out of 233 Republicans in the new House of Representatives. So that’s one question answered, isn’t it?

A version of this post appeared earlier in the Market Now newsletter. Click here to register at Bloomberg.com and subscribe to The Market Now daily email.