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Consider this: no sooner had the New York Yankees won the World Series, it parted ways with the series MVP Hideki Matsui.  In the minds of Yankee management, he was no longer worth the millions, regardless of his stats.  They dropped him even before the cheering stopped.  Multibillionaire Sam Zell purchased the Tribune Company for God knows how much.  But when the economy turned south, he elected to place the storied company in bankruptcy, without hesitation.  It is a common occurrence that owners of companies that default on their bonds would rather let the concern fail rather than invest more capital into the venture.  In all three situations, economists term the action taken as “strategic default.”  Banks follow suit when they issue new credit cards to people who have already failed to stay current on the old ones.  So why do the Mortgage Bankers Association and President Obama chide individual homeowners who default on their mortgages?  Why does the banking industry talk about the “message” that defaulting homeowners “send to their family and their kids and their friends,” arguing that we have a ongoing responsibility to make good on the loan, even when it is most definitely not in the long-term interest to continue to shovel good money after bad?

Just recently, Morgan Stanley decided to stop making payments on five San Francisco office buildings.  It had purchased the commercial real estate at the height of the boom, only to watch the values plummet after the 2008 crash.  No one - not former Treasury Secretary Henry Paulson, Jr., not President Obama, nor any other Wall Street banker - ever accused Morgan Stanley of unethical behavior for letting the property go.  In fact, no one ever thought that such behavior was unethical or immoral in the first place.  But the average American is cut from a different cloth, I guess.  He or she is supposed to honor all debts, even one where there is absolutely no hope of ever realizing a recovery of equity.  What gives?

The housing industry has managed to implant two prevailing notions that strategic mortgage defaults are basically immoral and antisocial.  First, it has convinced most of us that foreclosures depress the overall economic health of a given neighborhood and drive prices down.  If I remember my basic economics course at Lamar University, wasn’t it accepted wisdom that the individual player in the market society is not responsible for economic effects of their actions?  Oil speculators hope to drive up the price of oil. Hedge fund managers speculated in the purchase of so-called “credit-default swaps” which signaled doubt about the bank’s creditworthiness and made it more expensive to borrow and extend conventional loans.  Are they to be held to a different standard than the individual homeowner? 

Second, homeowners have bought the canard - hook, line and proverbial sinker - that defaulting on the mortgage cheapens the character of the borrower.  Well, fifty years ago, when our parents bought homes, a mortgage was truly something to be held for the duration.  Both the bank and the borrower had that in common.  No more.  Lending institutions now unload mortgages within days (if not hours) after closing.  And this is true in virtually all transactions in this fluid, global economy.  The simple truth is that negotiability and ease of transfer of assets is paramount to any enduring relationship you may have with a lender. 

Look, the homeowner enters into a contract which protects everyone from the failure to pay: the property reverts to the lender.  The defaulting borrower isn’t really skirting the obligation.  Rather, he’s suffering a real loss by voluntarily ceding the property back to the lender.  That’s no escape from consequences.  And the cold facts paint a grim picture.  Nearly a quarter of all mortgages are currently “underwater” (meaning that more is owed on the loan than what the house is worth); 10% are now delinquent.  That’s a staggering number.  Counseling people to continue to pay on this kind of debt is encouraging them to throw their money away.  Living in a capitalist society doesn’t mean that we have to enter into a suicide pact.

It’s time for the government and President Obama to stop lecturing these unfortunate debtors about their moral responsibility to make good on debt when the financial institutions have made a mockery of this so-called moral obligation to the country.  What if homeowners, by some grass-roots miracle, began to default when it became apparent to do so was in their best economic interests, just like Morgan Stanley or Arrow Trucking (the huge trucking firm out of Tulsa, Oklahoma which decided to shut down its vast fleet, without warning to its creditors, lenders or employees, on Christmas Eve)?  Maybe if lenders feared an deluge of strategic mortgage defaults, they would have real incentive to renegotiate their outstanding loans.  Isn’t this what the Obama administration has been after all along?  Why not just come out and level with the American people?  Tell them that if it’s no longer in your economic interest to continue to shell out the mortgage payment, walk away, rent a place at a pittance of the cost and be done with it.

This entry was posted on Monday, January 11th, 2010 at 4:56 pm and is filed under Items of Interest. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.