Although more than 32% of American homeowners have negative equity, only about one in ten chooses to walk away from their mortgage before being forced to do so by circumstances like job loss. As long as they are able to pay, they continue to do so despite the fact that the economically rational decision would be to turn the keys over to the bank that holds the mortgage and move out.
Felix Salmon of Reuters calls this "The world's largest guilt trip." Last March, Bush's Treasury Secretary Hank Paulsen insisted that underwater homeowners "who can afford their mortgage should honor their obligations." As Salmon points out though, "he would have fired anyone at Goldman who behaved similarly."
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Only in exceptional circumstances -- certainly not simply for being "underwater."
ReplyDeleteThe righteous man "keeps his oath even when it hurts" (Psm 15:4).
Sometimes morality bites.
Ok Chris,
ReplyDeleteHow about this. I buy a restaurant near a factory. The bank agrees to loan me part of the purchase price with a non-recourse loan taking only the building as security. Due to circumstances beyond my control, the factory closes and the value of the restaurant drops precipitously.
Should I keep paying on the loan? After all, the bank understood that the loan would be paid from the proceeds of the restaurant. It decided that the interest on the loan adequately compensated it for the risk that its security would prove insufficient in the case of default. If it had some expectation that I would continue to pay on the loan even if the business failed, it would not have made a non-recourse loan.
Is there a difference between this and a home loan?
Banks would stick it to the homeowners if the tables were turned. Oath schmoath. though I suspect you will counter me as well and convince me I am wrong.
ReplyDeleteChrisH,
ReplyDeleteI fully agree that this is what the banks would do, however, I think I am also on the same page with ChrisB to some extent in that I think a man's personal integrity doesn't count for much if it never causes him in any personal inconvenience.
For me, this conundrum is a product of an ideological commitment to laissez-faire capitalism and the market based solutions. "Oath, schmoath" is the response of a rational economic actor. So while I think that personal integrity should necessarily be inconvenient at times, businesses need to be regulated in a way that keeps it from becoming an absolute sucker bet.
Might it be less impossible to get the moral man to play by the banks rules (when dealing with their ilk), than to get the bank to act morally.
ReplyDeleteChrisH,
ReplyDeleteI'm not sure.
The difficulty I see is in limiting the moral man to playing by those rules when dealing with "their ilk." I have no problem maintaining the distinction between how I deal with a family member and how I deal with the bank that tries to clip me with a $25 fee every time I fart while my ATM card is in my back pocket. The trouble is that there is a continuum of "ilks" in between and beyond ranging from my next door neighbor to the one mechanic I trust to tell me the truth about my car to the local merchant that I generally think treats me fairly to the Best Buy that doesn't really stand behind the products it sells but doesn't intentionally try to screw me the way the bank does to the health insurer that is constantly looking for opportunities to leave me up the creek without a paddle.
I fear that the moral man who tries to deal with each ilk according to its own standards will find himself tugged towards the lowest common denominator.
"I fear that the moral man who tries to deal with each ilk according to its own standards will find himself tugged towards the lowest common denominator."
ReplyDeleteMmm hmm. And sometimes the wise thing to do is not put yourself in situations where your ethic will cause that conflict.
As far as the business loan vs the home loan, those are different situations. In a home mortgage, no one is explicitly betting on the success of an enterprise. You're just promising to pay the money back.
ChrisH is right -- the bank would probably not take the high road. That doesn't excuse you.
The rule isn't "do unto others what they would do to you if they had the chance."
Life assumes risk.
ReplyDeleteIf you have a mortgage payment that you accepted and can pay...you are obligated to pay it. Being "underwater" is a changeable thing. Two years later your house may have sky-rocketed in value due to some unforeseen circumstance.
Also...this falls under the category of protective self-interest and community obligation. Refusing to pay has hefty consequences for the consumer. Their credit will tank and it will come back to bite them in a huge way...like when their car gets totaled, they don't have enough money to buy a new one, and they need a car loan that no one will want to give them because they have proven themselves a huge risk.
As far as the community goes....screwing the bank doesn't just undermine rich CEO's. It affects the bank's solvency which ultimately has consequences that cascade down to the general population.....represented by those $25 fees you mention.
If you can pay...you should pay.
Terri,
ReplyDeleteDoesn't the bank accept the risk that its security will be insufficient when it made a non-recourse loan on a house?
Suppose the homeowner was planning to use the equity in his house to finance his children's education. Suppose his wife has a medical condition that will force her to retire early and he was counting on the equity to see them through until she is eligible for medicare and social security. Shouldn't he find cheaper housing and attempt to replenish his savings?
ChrisB,
Banks and borrowers were betting on the continued success of the U.S. housing market just as explicitly as the bank and borrower in my hypothetical were betting on the success of the restaurant. Adjustable rate loans with low teaser rates were made based on the assumption that the borrower would be able to refinance before the loan reset.
There is risk all around...for the bank and for the homeowner. Is it moral for the bank to be the only party to deal with the consequences of that risk?
ReplyDeleteIf a person is not morally required to deal with the consequences of their own risk, but is allowed to shift those consequences to another party...how is that moral?
To switch things up....what if they borrowed the money from a well-to-do family member and actually have a contract with them? If the family member is depending on the income from that mortgage to meet their own expenses....is it moral for the homeowner to walk away simply because they choose to?
Impersonal images of banks and corporations don't engender much sympathy....so it may seem easier to feel as if they can absorb the loss. What about the neighbor down the street from the homeowner who gets laid from her position at the bank because too many people are simply walking away from mortgages by choice and the bank has to cut employees as a way to remain in business?
Every action has consequences. you could say that the homeowner's first obligation is to his family....but you have changed the situation from one of defaulting by choice, without extenuating circumstances, to one in which there are extenuating circumstances--the wife with the medical condition.
My two cents is a mortgage is a business contract and should be viewed in the realm of the morality of said business. I believe the uncle for which I was named once stated there is no morality in business, or perhaps no ethics, either way, you get the gist...
ReplyDeleteTerri,
ReplyDeleteI appreciate your input.
The argument on the other side would be this:
(1) When the bank made the loan, it was counting on the borrower's economic self-interest to motivate repayment, not his moral probity.
(2) The possibility of a strategic default was just as much a part of the original loan contract as the possibility of default due to bankruptcy.
(3) The home owner who walks away from a mortgage does take a substantial financial hit, just not as big a one as he would if he stayed and kept paying.
As far as changing circumstances go, everyone who owns a home and everyone who was invested in the stock market has taken a substantial hit to their net worth in the last couple years and the need to reduce debt and replenish savings is very real. I simply chose a motivation for replenishing debt that I thought would be particularly sympathetic.
Let me propose another scenario. The homeowner lost his job and had to take another one at lower salary level. He has sufficient savings set aside to continue paying the mortgage for another two years at which point he will run out of money. He assesses the chances of returning to his former pay level as very low. Is he obligated to exhaust his savings before defaulting on the mortgage?
Dan,
I get the gist perfectly. How many beers had your uncle had prior to pontificating?
haha...I just realized that I wrote "who gets laid from her position at work" instead of "laid off".
ReplyDeleteWhole different meaning!
As far as your new scenario...too fatalistic! ;-)
A lot can happen in two years. There are seldom only two options for people. The house could be rented out, or sold at loss early instead of wasting money for two years and then selling at a loss. The person could get an extra job.
I'm not saying that the situation is easy.
I am saying that no one acts in a vacuum and questionable actions in our own self-interest never affect only ourselves.
And that is the test of integrity, isn't it? What do we do when the "right" thing isn't clearly beneficial to us, and may actually cost us something?
This comment has been removed by the author.
ReplyDeleteThe rule isn't "do unto others what they would do to you if they had the chance."
ReplyDeletearen't the rules determined in the contract?
How about this scenario: I'm underwater on my house. Bank is underwater on an office building they bought and I hold that mortgage. They are going to default, is it immoral for me to break my oath and do so as well?
Vinny, can't believe you'd stoop to ad hominem attacks on Dan's uncle.
Chris H
ReplyDeleteAs an aside....
Do you suppose the North Korean who took that photo of Kim Il Jong and released it on the internet is still living?
;-)
Surely not but it might be worth dieing for.
ReplyDeleteYour blog post has been all the chatter around the office today. Chris thinks it depends on how the contract is worded, Perry thinks morality isn't based in reality (probably the best response so far, though kills most of the fun in debating it,) my father even took a break from jezball to weigh in (not immoral.) I'm leaning towards mostly moral, though not ready to send my keys back to the bank...
ReplyDeleteI believe Uncle Dan was sober pontificating, it was when he was still teaching in the states I think he said it to some sort of business leader who's lecture he had to attend... on second thought maybe he snuck a flask in.
Dan,
ReplyDeleteI've really enjoyed this. I still cannot figure out exactly where I come down.
I am reminded of what W.C.Fields once said: "If at first you don't succeed, try, try again. Then quit. There's no sense being a damn fool about it."
I don't think a person should turn over his keys at the earliest point where the numbers add up in his favor, but I don't think he's obligated to forgo all his other financial needs and responsibilities to make the bank whole.