Walk away

I really like this post by Mike on Rortybomb (via KD). The background is the government’s programs set up to try to help people whose mortgage’s are underwater (they owe more than their property is now worth):

From Analysis of Mortgage Servicing Performance, more than 70% of the modifications resulted in an increase in the loan balance. Not staying the same, and certainly not decreasing, but piling on more principal for the loan:

In other words, banks and others are using a program designed to help these people (and that’s subsidized by us the taxpayers) to make more money and putting most of the people in a worse position. Lovely. Especially because the banks are punishing the people who are trying to find ways to continue to pay, those who want to meet their obligations.

This amoral practice leads to some philosophizing:

There’s a lot of arguments for “strategic defaults” which we will leave to the side for right now. The counter-argument is that lending has an element of “social trust” norms build into it, a trust that isn’t easy to replicate and once broken it is very difficult to rebuild. The small, difficult to quantify but ever present, elements of these norms are what form the glue of many of our credit markets. Lenders trust borrowers, and borrowers can trust lenders, and this takes the rough edges off the credit market.

He links to this interview with Steve Waldman who continues the thought to its conclusion:

I think that the moral thing for most borrowers to do, under present circumstances, is to default on loans when it is in their financial interest to do so.

The financial industry has changed the economic and legal landscape surrounding consumer lending so that it simply bears no resemblance at all to interpersonal loans among people of good will in continuing relationships. But those are the norms they ask borrowers to adopt with respect to repayment. That act, demanding others act in accordance with standards from which one exempts oneself, is morally offensive. In a society which, despite economic difference, accepts no social class, ones moral obligation is to behave towards others as others must behave towards you. It is clear that, in general, banks and the special purpose entities that increasingly replace them treat their transactions with borrowers as hard-nosed business arrangements which they are willing to pursue on adversarial terms when doing so is in their interest. Borrowers should do the same. To do otherwise is to reward the cynical immorality of others, which serves no social good.

You should read Kevin’s link where he also discusses the effort banks went through to stop efforts that really would have helped and then go to Mike’s follow up  post.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: