June 12, 2010
A good Washington DC contacts told me that a public relations/media push to demonize those who decide to walk away from mortgages they can still afford to pay (aka “strategic defaulters”) is underway. Expect to see a good bit of moral fervor as those who choose to cut their losses are attacked as immoral, irresponsible, and abusive.
|The concept of debtors’ prison was mostly eliminated in the 19th century with the exception of taxes owed to government.|
There is a wee problem with the “blame the ruthless borrower” narrative. Banks who acted in a similarly ruthless manner have trained their customers to behave the same way. This shift in prevailing attitudes is the logical and inevitable result of financial firm, taking an increasingly predatory posture toward their customers. Borrowers are responding in kind, by taking a cold-blooded and legalistic look at their agreements with lenders.
So now they are going to try to stuff the genie back in the bottle by castigating borrowers who treat their obligations as “just business”, the way banks do. But the problem with this little narrative is that the bank haven’t simply been pig-headed about adherence to their often pig-headed contracts (and before you argue otherwise, go read your full credit card agreement, which at Bank of America runs to 30 pages, or a home equity line of credit agreement, and then we can talk). It’s that even with doing everything possible to skew the playing field in their favor, they still had to be rescue en masse. Having been deadbeats and strategic defaulters of the first order, they continue to manifest their characteristic unmitigated gall via (through proxies and ads) hectoring the public about honorable behavior.
Now it is true that this is in fact a very destructive trend. A calculating, contract-driven mindset eats away at the foundations of commerce. When I was young, it was possible to deal with most clients on a handshake (I’d still write the arrangements up, but it was mainly a device for confirming that we had heard each other correctly). Now pretty much every one I know has very carefully crafted agreements precisely because if things stray outside the bounds initially contemplated, it is much less likely that the party on the other side of the table will try to reach a middle of the ground resolution. It is now the norm that parties to a contract will try to exploit ambiguous or unforeseen situations to their advantage.
- A d v e r t i s e m e n t
Now this is a destructive trend. An erosion of trust leads to much greater contracting and dispute-resolution costs, a de facto tax on all commerce. As I discuss in ECONNED at greater length, it’s prohibitively costly and time consuming to negotiate agreements that contemplate every scenario. It would be far better if the banksters were to lead by example; most consumers would be delighted to deal with an institution that hadn’t forgotten the notion of reciprocity (which is why many consumers are switching to community banks and credit unions). But they no doubt want the average Joe to toe the line while they carry on with their use of complexity and opacity to shift hidden risks and fees on to overmatched customers.
One example comes, in of all places, a Republican motion to recommit (an amendment to a bill when it is on the floor made by the minority party). Now narrowly, one might well agree with the idea behind this amendment (to prevent people who strategically default, which will be difficult to define in any tidy way, from using FHA programs). But look at this section, which is roughly 2/3 of the entire amendment:
A strategic default occurs when a borrower decides to stop paying their mortgage even though they can still afford their payments. It is usually undertaken by those who owe more on their mortgage than their home is currently worth.
The Wall Street Journal has reported on families that have chosen to stop paying their mortgage and instead use the extra money they are saving each month to “buy season tickets to Disneyland…take a Carnival cruise to Mexico…” and go out to dinner more often.
Companies have even sprung up to capitalize on the new trend with websites advising people (for a fee) on how to go about a strategic default. These companies actually advertise that after a few years an individual who chooses to default on their mortgage should be able to buy a home again, including through government loan agencies.
60 Minutes reported on individuals who defend their decision to strategically default saying, “…with the money savings that I will have in four to six years, I’m confident I’ll have money to buy my way into a house if I want to.”
Strategic defaults raise costs for responsible borrowers, many of whom may currently be struggling to make their mortgage payment themselves, but who take their obligations to pay their debts seriously. The MTR would ensure that no one who chooses to simply stop paying their mortgage, even though they can afford to do so, is able to benefit in the future from the government’s FHA program.
But it might be more straightforward to restore debtors’ prison. David Walker of the Peterson Institute seems fond of them:
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