Default Now!

The New York Times had an interesting article entitled “Walk Away From Your Mortgage.” In it, reporter Roger Lowenstein discussed a new phenomenon: homeowners who were voluntarily defaulting on their housing loans. Yes, voluntarily – it’s not a result of an immediate financial crisis or emergency of some sort, they don’t want to pay, so they don’t.

The same phenomenon was discussed by Megan McArdle in The Atlantic, but in the opinion piece “A New Breed of Deadbeats.” It’s pretty clear to see where she falls on the issue.

McArdle discusses the issue from a moral standpoint. She acknowledges that a vast majority of foreclosures are from people who cannot possibly pay the mortgage and therefore have no other choice to default. However, she argues that a growing number of people are trying to game the system by simply walking away from the mortgage because they owe more than the house is worth (especially after the housing market collapse on the cusp of the recession that Dennis Haysbert keeps talking about). She calls these people “morally appalling” and points out that there are a “sizable” number of people who are okay with this practice.

At first glimpse, it’s hard to see why. After all, a contract is a contract, and by voluntarily walking away from something like that while others are struggling to hang onto their homes is appalling. Or at least I thought so.

Lowenstein’s article in the Times was an interesting one in that it explained how corporations do this kind of thing “routinely.” The example given is of executives at Morgan Stanley deciding to stop making payments on a group of San Francisco office buildings (as a result of the plunging values of the buildings). Lowenstein writes, “Nobody has said Morgan Stanley is immoral – perhaps because no one assumed it was moral to begin with.” And yet, individuals are held to a morality code that doesn’t exist for businesses.

And so goes the debate. Why should homeowners not take advantage of strategic defaults when corporations have no such qualms? Of course there will be consequences (largely financial), but the disconnect remains: it’s the difference between a business decision and a moral one.

I’m honestly still divided on these so-called strategic defaults. In my ideal world, if homeowners are somehow morally obligated to hold onto (and eventually pay off) their mortgages, then no double-standard should exist. Lenders should be obligated (morally, legally, whatever) to renegotiate those mortgages if the country’s financial situation changes significantly.

But something tells me that’s not going to happen.

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