Over at CalculatedRisk.com, there is an interesting post today pointing to a story in the LA Times about so-called “strategic defaults,” or defaults on mortgage loans when the borrower has the ability to make the mortgage payment. The implications of ethics as it relates to this issue are discussed in the related materials found at CalculatedRisk, not so much to determine the rightness or wrongness of a borrower’s decision, but to address how ethics might affect the decision to default and what public policy implications ethical attitudes might have in this regard.
Public policy aside, I must say that I am a bit surprised by the degree to which such decisions by homeowners are couched in the language of ethics and morality. I find this surprising because we rarely, if ever, ask such questions of corporations and their officers when they seek protection from creditors in bankruptcy court. Business loans are business contracts, and all lenders and borrowers are well aware (or should be) of the possibility of bankruptcy and what that means.
Mortgage loans are contracts, too. If someone chooses to walk away from a mortgage because his investment is underwater, how is that so different from a corporation that screws its unsecured creditors in bankruptcy court, especially when said mortgage loans are structured in such a way that makes it easy to walk away? Both decisions, while relieving the distressed parties of certain debts, do have consequences. It’s not like pushing re-start in a video game. For example, a mortgage borrower might see his credit score negatively impacted or he might be sued, in the same way that a corporation might find it hard to establish business relationships with necessary vendors post-bankruptcy.
In a related report released in June quoted by CalculatedRisk, three academics conclude:
The most important barriers to strategic default seem to be moral and social. Ceteris paribus, people who consider it immoral to default are 77% less likely to declare their intention to do so, while people who know someone who defaulted are 82% more likely to declare their intention to do so. While moral attitudes toward default do not seem to be affected by the surrounding environment nor by the anger people exhibit vis-à-vis the current environment, the social pressure not to default is weakened when homeowners live in areas with high frequency of foreclosures or know other people who defaulted strategically. Our results suggest that these contagion effects should be seriously considered in public policy regarding housing.
In an earlier post, CalculatedRisk said much the same thing, that, in essence, one of the biggest fears in the mortgage industry is that the social taboo of defaulting on mortgage debt will disappear, leading to many more defaults.
I would go a step further and suggest that there should be no social taboo to walking away. It is a business decision with business consequences, and this is precisely how people should look at it. To start injecting the mortgage problem with “ethics” at this point seems ludicrous. After all, there was little talk of ethics when all the suspect loans were being made or when the decisions were made to rescue the banks at the center of the storm.
But, as I said before, the ethical rightness or wrongness of the decision per se is not the focus of the materials I’ve alluded to – they merely explore the implications on public policy of a culture that abandons the taboo against strategic defaults.
It is instructive to explore how the language of “ethics” has insinuated itself into the mortgage conversation far beyond its relationship to strategic defaults. For example, how many times have we heard politicians berate the banks for their failure to modify loans to underwater borrowers, and how many times do those arguments rely on a sense of “ethics.” Politicians are quick to point out the “duty” that banks have to do the “socially responsible thing” in helping customers cope with loans they can’t repay. Of course, often, there is a very solid business case to be made in favor of loan modification, but the business case usually takes a back seat to “ethics” and “social responsibility” in public discourse.
It is easy to see, then, how quickly the slope gets slippery when invoking “ethics” in the mortgage quandary. If, according to the politicians, banks have a duty to bail out borrowers, what reciprocal duty do borrowers owe banks? If we take the position that borrowers needn’t worry about the “ethics” of walking away from a mortgage, does that mean mortgage lenders likewise have no ethical duty to modify loans or otherwise help borrowers in trouble?
No comments:
Post a Comment