Four weeks ago, I bought a grill on my credit card. It was not the best grill Home Depot had--indeed, because I am cheap, and also have never longed to rotisserie in my very own back yard, it was the cheapest grill they had in stock, except for tiny tabletop camping models.
It's a nice grill. But I've since realized that our landlords have an old, broken grill that we might have been able to repair with enough duct tape, saving me almost $200. Meanwhile, I've discovered that I can't sell the grill for a profit, because Home Depot seems to have a large number of very similar grills in stock which they are willing to offer to buyers for a mere $200. For that matter, I can't even sell it for the value of the loan with which I financed it. The equity in my grill has dropped by about 50%. Given all that, I don't see why I should be required to pay back the credit card company. After all, they knew when they loaned me the money that I might not pay it back, and I suspect they also knew that I might not like my grill as much as I expected to. Hell, the dirty bastards may well have known that I was going to end up underwater on my grill loan. I don't see why I have any obligation to repay them.
This seems to me to be approximately the logic behind the people saying that folks who took out stupid loans don't have any sort of moral obligation whatsoever to make good their debts. The loan company didn't have your best interest at heart, the logic goes, so why should you take care of them at any cost to yourself?
Well, imagine you're the one I borrowed the grill money from. I doubt almost anyone reading this would be plunged into bankruptcy by the loss of $200. So why should I pay it, when you knew just as well as I did that the grill would depreciate and I might be better off without it?
Call me bourgeois, but I think that when you sign your name to a document promising to repay money you've borrowed, you have an obligation to repay the money you've borrowed.
Now, if you can't repay the money you've borrowed, I think bankruptcy is an excellent thing. And I have always staunchly resisted the tide of Republican moral outrage at people who make stupid decisions about borrowing money and then have to declare bankruptcy. People make stupid decisions, yea, even unto stupid decisions about their ability to afford large flat-panel televisions and jet skis. Any system that punishes stupid decisions so harshly that it makes people a prisoner to the dead past cuts off its nose to spite the faces of people who wouldn't be in that kind of debt in the first place if they had been any good at predicting the consequences of their behavior.
By the same token, however, I can't really buy the argument that people who made stupid decisions about lending money perpetrated some kind of moral outrage on the borrower that renders any obligation to repay them moot. It is all very well to note that the originators may not have cared because they just repackaged the loans into securities and sold them on, but that just pushes back the stupid decision one more level. Felix is urging his namesake to shaft the people who bought those securities, on the grounds that because they were stupid enough to have bought them, he has a perfect right to push the costs of his own stupid behavior off on to them.
Undoubtedly many of my readers think that that sort of thing is different because we don't have a moral obligation to repay our debts to corporations the way we do to people. This strikes me as fundamentally wrongheaded in two ways. First, the bourgeois belief that an honorable man repays his debts if he is able is one of the unnoticed underpinnings of a stable, prosperous democracy. Countries that believe that one can pick and choose whom one is obligated to repay on the basis of how good a person the lender is, how tight their relation to you, or whatever, are low-trust societies with extremely high transaction costs and underdeveloped markets. If you think you're only obligated to repay regular folks like yourself, then no one but your close friends and family will lend you money. This makes capital formation tricky.
But second of all, just as there is no way to tax a corporation, there is no way to default on a corporation. Whenever you default, you are taking money from some person: a shareholder, a creditor, an employee who loses their job when the corporation is liquidated.
And to return to the question I asked earlier: what if Felix were defaulting on you? Because he probably is. His mortgage bonds are owned by pension funds, bond funds, and of course, investment companies whose debt is in turn held by bond funds, pension funds, and insurers. If they suffer gigantic losses, they will either leave a bunch of people unprepared for various forms of financial distress, like retirement or a house fire--or the taxpayer, aka you, will bail them out.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
There's some subtlety here with differing state laws and types of mortgage. There are some loans that truly are written with no recourse beyond taking ownership of the collateral, and no bankruptcy is needed to walk away from them.
Your basic point that every single debt is someone else's asset remains quite valid.
I've always believed in treating personal debts in the same way a loanshark would: you borrow money from me, you pay it back. If you don't pay, I'll break your kneecaps. Fear of personal injury is a wonderful motivator.
Now, to use your example above, bankruptcy is the fear of personal injury that drives people to pay their debts. There are probably lots of honest folks that would pay their debts without coercion, but let's just take it as a given that most people would default absent some threat. The problem with taking the stigma out of bankruptcy is that you make people comfortable with it: if there is no shame or fear in it, then people tend to treat it more lightly.
I take a very Old Testament view of people who default on debt, because defaulting on a debt is not much different than outright thievery. I don't see the moral difference in stealing money from someone and borrowing it with no intent to pay it back.
I'll give you $125 for the grill.
Excellent post, Megan.
I would just point out that it's not nec. different countries that believe one can pick and choose who to repay it's different cultures. The two categories largely overlap but not perfectly and to the extent that you decide to have no immigration restriction and no push towards assimilation of immigrants, they will overlap less and less.
I think lots of times the more extreme libertarians miss the impact of this distinction in their zeal to erase national borders for the good of mankind.
Also, let me be the first to say: Barbecue at Megan's! Woo-hoo!
This moral lesson is a bit too simplistic. Did you buy your $200 grill based on being told by people who are supposed to advise you (lenders, appraisers, realtors) that it was a rapidly appreciating asset? Then there's the matter of scale. People are underwater by multiples of their gross annual income (assuming they are still employed). If you're underwater by 200k on your mortgage in a state with no recourse mortgages, say good bye to concerns about "doing the right thing" for your stupid lenders (or the vulture investors who may have recently purchased your loan at pennies on the dollar). The people with money at the top are getting their help, so take advantage any way you can. No reason to put yourself in debtor's prison by renting the house you thought you purchased.
You're bourgeois.
But what if the money I lent you was money I had printed on my super-duper money generation machine. That is, it wasn't real money. Because none of this was real money, was it? (Yes, yes, of course it was "real" in the sense it existed, somewhere in the ether, but it was pretty much doomed to evaporate, was it not? Because it has.)
Where does that place the moral obligation? Or to put it another way, if someone is handing out free money on the street, do you actually expect that it will not be taken? Some might not, expecting some trick, but people being people, most of them will, won't they?
Yes, it's bad to default on debts. However, there is a contract that outlines specifically the cost of doing so. So, you are making an investment in your future, just like the bank was making an investment when it lent you money. It's also bad to behave recklessly and expect someone to clean up your mess (that applies to all involved here, including passive Americans who don't do diligence on their banks/insurers/etc).
Seems to me your ultimate point is that, if Felix doesn't pay his loan, and we extrapolate that out, we'll end up with defaulted pension and insurance funds, which is bad for everyone.
Unfortunately, it seems to me that this is the exact reason why the nationalization of the big interconnected banks is so difficult a proposition. We can't just write down the assets because the FDIC only has $19B and if the assets are not worth enough to pay out after seizure, we're gonna be in a bad way. (Similar arguments should follow for the non-retail parts of the banks). As much as I like the idea in theory of letting the FDIC restructure and letting that be that, I doubt it is practical in any real application.
(note that there is nearly infinite complexity for this issue and a comment box is not an ideal location to compose a detailed argument)
The question of personal responsibility came up earlier today on lesswrong.com, overcomingbias.com's new sister site, here is part of a comment I made there:
Also, more generally, I am a libertarian largely because I believe that everyone is totally and completely responsible for their own actions. Even if someone is holding a gun to your head, you decide what you do in response (and are responsible for letting yourself get in that position). Or if you are drunk or drugged, you are responsible for putting yourself in that position and therefore for what you do while that way.
Not fair. Not fair at all. As I started to read this post I became o-o-o-o-o-h so excited in anticipation of one of your 6,000 word rants on some mundane consumer issue (the plumber didn't show up! my sideview mirror broke!). Having baited me, you switched. Evil. Satanic.
melwrc,
I guess that's where we differ. I belive that people are responsible for their decisions reguardless of what they have been told. Just because your parents told you something, or the church, or the government, or the media, or your peers, you are still the one responsible for your choices.
Clean the grill and take it back. ;)
Brian,
Megan is far smarter than me in terms of economics, but it seems to me that everyone is studiously trying to turn back the clock on something that became obvious weeks ago: our financial sector is insolvent. It's gone beyond the point where playing book-keeping tricks can hide the truth. Pretty soon the corpses are going to start to turn black and stink, and at that point it's going to be obvious to everyone.
I'm wondering why Geithner isn't simply stating the obvious and working on a contingency plan. Not "How do we save the banking system?" but rather "What do we do now that the banking system is dead?". This is the real argument, not "nationalization". There are no assets left to nationalize.
A smart Administration would be trying to figure out a way to jump-start private investment and entrepreneurship in this space. What we get instead is talk of higher taxes and nationalized healthcare. Draw your own conclusions.
Brian, all contracts perform within a specific cultural context which controls how the contract is enforced. No contract can possibly detail every contingency, and all to often are overruled on points they do address by courts which enforce them (which would be less of a problem than it is, if you could predict which way a court would rule, as it is it is too random). So one way of interpreting Megan's point is that adding a moral imperative to repay debts has better societal results than saying there is no non-contractual reason.
Argument from analogy: not logically consistent, especially when the scale between a grill and a house is so different. See also: argument from design/God. Failure.
Defaulting makes perfect sense, especially if you're an idealized, perfectly rational human being. No downside, lots of upside.
Okay, a home is not a grill, and this is a terrible analogy.
These are contracts between two parties, a lender and a borrower. The borrower has no direct responsibility for the lender's shareholders, employees, or creditors. If the lender makes a loan that the borrower cannot or will not pay back, it can simply repossess the asset. If the asset is worth less now than it was before, that's the lender's problem. Period.
You'd think it would make good business sense for the lender to understand the market in which it is providing capital and thus structure its loans accordingly. That way it could avoid potential problems like the mortgage crisis now. It's not the borrower's role to do this; they have no responsibility for the lender's shareholders, etc.
What you see are lenders making poor business decisions and entering into contracts with people they didn't adequately vet, in a market they did not understand. There are TWO parties to each mortgage, both are responsible for "defaulting on you," as you put it.
But you only think one of those parties has a moral responsibility.
Convenient.
I think I remember that one of Peter's old FreedomWorks co-workers had a bankruptcy once and wiped out his debt. Maybe Peter could him (her?) what they thought about their "moral obligation" at that time.
"Did you buy your $200 grill based on being told by people who are supposed to advise you (lenders, appraisers, realtors) that it was a rapidly appreciating asset? "
If those people "who are supposed to advise you (lenders, appraisers, realtors)" told you to jump off a bridge would you do it?
Are you resonsible for knowing that "lenders, appraisers, realtors" are sales people and don't have your best interests at heart.
In many states, (including California, where most of the bad loans are) home loans are truly non recourse.
You have a legal and moral obligation to pay the loan or give the house back.
Suppose Home Depot had said "we will take back the grill at any time for any reason for a full refund within 2 years", or the law required such a policy. Would you be immoral to return the grill?
Of course, if you're a bank or a derivatives trader spending trillions of dollars of other people's money, then you deserve trillions from the Federal government.
The more and more I read such incredibly one-sided and bombastic posts like these, the more I understand why the French hauled off so many to the guillotine.
This is absolutely unbelievable and utterly disgraceful.
But you only think one of those parties has a moral responsibility.
The problem is that we as a society have gone from thinking that credit is a privilege to thinking that it is a right. Even the poor, we are told, should be able to borrow money at cheap rates. (Remember all the yelling about the "predatory" paycheck-loan places in poor neighborhoods?)
Well, guess what? Lots of people are lousy credit risks, and that's why banks traditionally refused to lend to them. But in steps Uncle Sugar (backed by the cries of the Left) and demands that banks let poor people get credit cards and buy houses at low interest rates because they have a "right" to it. With wholly predictable results.
The moral responsibily always rests with the person getting the loan. Always. If you are too dim, doo dumb, too drunk, or too confused to borrow money, that's on you. In a bizarre and counter-intuitive way, the lender is actually taking a moral burden in loaning to you, because they are harming you by allowing you to take on more debt than you should. They are doing it in violation of their own self-interest, and in service to the wrongheaded government belief that people "deserve" credit.
Bah.
The West had a competitive advantage versus the rest of the world because we trusted each other to do the right thing. We didn't waste resources following people around to make sure. We didn't have to negotiate every last agreement every time something unexpected comes up.
It would be bad to lose that advantage.
People who default on their home loans because it's convenient probably pee in the pool, too.
I don't know (I haven't seen convincing evidence either way) whether the big banks are actually insolvent or not, but I have been reading the "economic collapse" literature since I discovered Casey's "Crisis Investing" in the mid-1980s.
I have not seen any real dis-proof of anything they wrote, but the collapse never seemed to happen. I finally came to the preliminary conclusion about ten years ago, that what was happening was that there was more resiliancy in the real economy than their models were showing. And that it was all too likely, if that was true, that the strains from the gov't interventions were simply building up and things would really get bad when the limits of the economy's "elasticity" were exceeded.
So if things get better within the year, I will be greatly surprised and will modify my conclusions again. But I won't be surprised if we are heading into another extended, decade or more even, great depression. Especially with the government's further help to keep things from "correcting".
While I think people should have the integrity to pay off their debts, I'm not sure the analogy works. Both parties knew it was a non-recourse loan going into it; the lender can seize the collateral and can't go after your other assets. In making the non-recourse loan, the lender has implicitly agreed to the risk of getting stuck with depreciated collateral. If the loan was recourse and Felix skipped town and tried to avoid paying the bank, that would be bad, but since both parties understood the risks going into it, I'm not sure what the problem is.
Any economist worth their weight in salt recognizes that sub-prime merely unmasked serious structural weakness (read: wanton greed and irresponsibility) which go way, way beyond morons living beyond their means.
Here's the way I look at it:
Moral Obligation/Legal Obligation
Speculative borrowers who default:
Moral Obligation : Fail
Legal Obligation : Pass (in many states)
Bankers who make purely speculative loans with other people's money (i.e. those that knew the buyers couldn't afford the payments and the loan could only be paid back if asset prices rose) :
Moral Obligation : Fail
Legal Obligation : Fail
What? Mo reasonable borrower believes they owe a moral responsibility to the bank's shareholders or employees, which is the subject of Megan's post. That's because they don't.
Also, you need to review your history of the CRA. You have some facts wrong.
"Suppose Home Depot had said "we will take back the grill at any time for any reason for a full refund within 2 years", or the law required such a policy. Would you be immoral to return the grill?"
And that's the difference.
Tyler:
The structural weaknesses go all the way back to (no surprise) the New Deal and Johnson's Great Society programs. Government meddling in capital markets to make them more "fair" skewed the behavior of people in the markets. The normal downside to greed is personal ruination -- you must always make investing a knife-edge between the maximum possible gain with the minimum possible risk. But implicit government underwriting allowed people to take leverage to absurd levels because there was always the federal government waiting in the wings to backstop any losses.
Fannie and Freddie are the most obvious examples of this (they weren't really "private" at all since Uncle Sam did indeed step in to rescue them, so only the profits were privatized; all the downside risk was borne by the taxpayers). But think of the case of AIG, where CDS's were the virus that brought down the host. A CDS is really just an instrument to lay off risk, right? So why were they so abused? They were abused because no one thought they'd really need them, but due to government regulations they (or something like them) was a virtual requirement. CDS's are a classic case of unintended consequences of government regulation. Mark-to-market provided an amplifier that made a simple disaster into a genuine catastrophe.
People can demonize the "greedy Wall Street types" all they want, but this is pure populist horses--t. It's class-warfare nonsense. This crisis was purely the making of the federal government.
What is this 'moral obligation' thing? Is that a "free market" thing? Ayn Rand would give you a scolding: 'moral obligation' is the way that the weak bully the strong.
The fiduciary duty of Very Big Bank is to maximize their profit at every opportunity.
Likewise, the fiduciary duty of Felix LLC is to maximize the present value of his future flow of happiness.
If mailing the keys to the bank maximizes that value, he would be *wrong* to not do so.
Am I correct in thinking that most people belive that the "lenders, appraisers, realtors" of 2003 through 2007 were lying?
I honestly don't think they were. I think they sincerely felt that housing prices always go up and if you didn't take out that no-doc reverse amortization loan, you would never be able to buy a house.
People need to understand the risk isn't that the people you hire to advise you are cheating you, perhapse the biggest risk is that they are wrong.
Oh Jesus, Monty...you're so f*cking myopic it's not even funny.
Government made us do it is the excuse of the intellectually lazy and the weak.
It's nearly midnight where I live, so I'm too tired to waste my last waking minutes refuting such oversimplified stupidity and completely bunk logic.
Buyer beware. It is really that simple.
If you borrow money for something, a grill or a house, then you have to either pay the money back or lose the grill or the house, it doesn't matter what your brother in law told you or what you read in the paper in terms of how much your grill/house would appreciate.
And this has nothing to do with the securitized mortgage fiasco, where the same rule should apply, you took the risk in buying the security and you should have to live with the results, good or bad.
I have no problem with the deadbeats defaulting on their mortgage. I only have a problem with the gov't propping up the deadbeats.
> CDS's are a classic case of unintended consequences of government regulation.
Hmm, so absent government regulation, Wall Street financial wizards would not have been eager to find some mechanism (i.e. insurance) to turn risky MBS's into ultra-safe-rated investments?
You're saying there's no market demand for secure (er, "secure") investments with a good return?
I think that's a bit wacky.
Although Fannie and Freddie are part of the problem, they're not all of it. The government-backed CRA loans you speak of are a small percentage of the overall mortgage-backed securities problem.
But you're also overlooking something. Under the original CRA, CRA loans could NOT be securitized, meaning they could not be a part of any CDS. That rule was in place precisely to combat the scenario we're in now. When that rule was eliminated at the same time as the repeal of Glass-Steagal, it pumped those CRA loans into the CDS market.
So in reality, it was the lack of government regulation that led to the Fannie and Freddie problem to begin with. Not that they're blameless, mind you, they're not. But they're not the only cause of this, not by a longshot.
"The fiduciary duty of Very Big Bank is to maximize their profit at every opportunity."
Wrong. It is to maximize some combination, depending on owners' preferences, of future value and current profits.
I'm not sure what the problem is.
Corporations make financial decisions based on the well being of their shareholders. No morals involved, just the bottom line is what matters. This has been drilled into our heads for years now. That individuals would follow this same advice, and make a financial decision based on their own best interests is no surprise. If a corporation does the same thing it's a "business decision" if an individual does it it's "moral bankruptcy" See the difference?
In short, if I was $300,000 underwater on my house with payments of 50% DTI, I'd walk away and give the house back to the bank as per our agreement. How many people have an extra $300,000 lying around just to make themselves feel better about doing the right thing?
Wrong. It is to maximize some combination, depending on owners' preferences, of future value and current profits.
They also have a fiduciary duty to depositors and others who loaned them money.
Not to nitpick here, but my understanding is that, under the law, only individuals have fiduciary duties, not [public] companies. Officers and directors of the company have fiduciary duties to the company and, by extension, to the company's shareholders.
Undoubtedly many of my readers think that that sort of thing is different because we don't have a moral obligation to repay our debts to corporations the way we do to people.
Yes, you have a moral and legal obligation to honor your contracts. And given a non-recourse mortgage, surrendering the house does in fact honor the contract. I'll agree that taking advantage of the foreclosure process in order to stay in your house as long as possible without making payments is ethically dodgy. But as I said in the previous thread, I don't see any difference between mailing the keys to the bank and breaking an apartment lease in the middle of the year.
For someone who defends the credit card company's choices to do things like universal default, you seem very comfortable imposing social norms on (only) one end of the credit card transaction. The gentlemanly thing to do is not change credit card terms in the middle of the contract too - what does that make the cc companies?
And your grill story is a weak comparison. The real comparison is if you can only make the minimum payment on your cc, and will be under the debt for a dozen years. Should you go bankrupt?
Jeez. There is no moral responsibility question here. It's a contract question and it's a question often faced by corporations: Is it better for me to default on a contract or to perform despite the losses I will incur?
It's a business decision only. And, as always, Megan wants to frame questions to the benefit of corporations.
Let's see. Should I feed my family or continue to pay the onerous mortgage?
Jeez
> Wrong. It is to maximize some combination, depending on owners' preferences, of future value and current profits.
Ok thanks, Bill and Nelson, I stand corrected.
Megan says:
> But second of all, just as there is no way to tax a corporation, there is no way to default on a corporation. Whenever you default, you are taking money from some person: a shareholder, a creditor, an employee who loses their job when the corporation is liquidated.
Ha ha. There's no way to tax me, either, because if you do, I will demand a raise from my employer (or, if self-employed, raise the price of my the quilts I knit) or reduce my charitable giving to make up the difference.
So if Megan defaults on that $200 she borrowed from me to buy the grill, because she just can't pay, it's ok - I don't consider her an evil person.
However, she should know that she's actually taking the money from the widows and orphans I would otherwise be donating that very money to.
Although I don't disagree with the gist of Megan's post, we have to remember that in many -- perhaps the majority of such cases -- it's not just the borrower whose quality of life stands to improve by screwing the lender. There's also the children. I'm not sure I'd personally be able to justify a serious hit to my children's prospects in order to make good on a loan, if that's what the specifics of my case entailed. Mind you, I'm not saying that the welfare of one's offspring justifies all manner of moral failings. But it might justify marginally reducing the profits of a hedge fund in Zurich. Obviously this reasoning would only hold for honest cases of stupidity and/or "blameless" economic hardship. In other words, I'm excluding the cases of people who borrowed with the intent of not repaying.
I apologize if I'm repeating the point of a previous commenter, as I haven't had time to peruse the thread.
In every transaction, it takes two to tango and there's plenty of blame to go around here.
Defaults are a cost of doing business and CA is a non-recourse state, so the increase financial hit upon default should have been priced into the interest rate. Furthermore, the bankers and appraisers *should* have had better information about the long-term prospects of the housing market, especially if they sold a crazy low-down payment, low interest mortgage with the expectation that the owner would come back in two years for a re-fi. That was their business model and they should have understood it better. But then it really didn't matter to the guy who wrote the loan because he promptly sold the paper up the food chain and washed his hands of the mess anyway
Likewise, the borrower should have thought longer and harder about buying a variable mortgage with no money down. But if you're a neophyte in these matters and every voice you hear says that this is the right play, then it's hard to not go along (or it should trip your Spidey Sense). But if you can't afford the mortgage, you can't afford it. So you default and file bankruptcy. It'll cost you in the long run, but you've got to eat today.
Is it immoral to walk away from a loan you can afford, but choose not to just because the price has declined? Not if you signed the paper in good faith way back when. It may be stupid or petulant, or it might be a sound decision based on your expected need for credit in the next 8 years.
It looks like pricing models all over are totally botched -- either the banks failing to account for default risk, or homeowners seeing too-large incentives for defaulting. Making rational decisions based on the agreed-upon rules isn't immoral as long as the rules weren't gamed in the first place.
"They bought the ticket, they knew what they were getting into. I say: Let 'em crash." That goes equally for the lenders and the borrowers.
This moral lesson is a bit too simplistic. Did you buy your $200 grill based on being told by people who are supposed to advise you (lenders, appraisers, realtors) that it was a rapidly appreciating asset?
None of these people are supposed to advise you.
A lender is a salesman. He is out to sell you a mortgage, on the most favorable-to-him terms that he can secure in a competitive market. Just as there are friendly salesmen who will speak the truth and find a deal that truly works for you, there are friendly lenders who will do likewise. But your default assumption should be that a lender has the same motivations and (lack of) scruples as a car salesman.
An appraiser's job is to assess the market value of an asset. This assessment is not "advice" in any meaningful sense. It is simply evidence which must be weighed.
And lastly, contrary to popular belief a realtor is not an adviser either. The realtor-as-broker is there simply to help with paperwork, and the realtor-as-buyer-agent is there to represent your interests in the transaction, but not to tell you what your interests are or should be.
Yes, people may not know these things. They may sincerely believe that all these people are their friends and are duty-bound to give them a great deal and a fruit basket. But it just ain't so. There are plenty of books, and seminars, and tv shows, and internet sites out there that actually will give you advice, and give you the hard truth. Anyone who enters into a house-sized financial transaction without doing that first jot of homework does not deserve to be rescued by the taxpayers. They f***ed up, and they need to pay the price.
What a lot of people (like Tyler) seem to be missing (perhaps on purpose) is that markets aren't abstractions -- they're groups of people working to some purpose. The behavior is always motivated. The motivation may not be rational -- the guy wagering his rent money on a sure-thing horse isn't using differential calculus to come up with his strategy -- but it is nevertheless a motivation.
Government policy and regulations provide motivators, both positive and negative. It's like a heat-pump: too little moderation and the markets overheat and run away; too much and they freeze up. But the mere act of moderation introduces behaviors into the system -- the people applying the heat must take the existence of the moderator into account. And often these behaviors are quite far removed from the ones the regulators intended.
Take mark-to-market. The intent was to make sure that assets are valued sanely at any given point in time; fair enough. But what really happened is that it forced companies to dramatically mark down the values of their assets beyond any reasonable point because the entire market had gone crazy. Mark-to-market essentially made some assets un-price-able. And investors, who hate uncertainty above all things, simply avoid these investments until some kind of reasonable price is put on them. It was the government regulation and not the market reaction to it that was the harmful action here. The market is reacting in the only rational way it can.
There are dumb borrowers, and good ones; there are dumb lenders, and good ones. Among the dumb lenders and the dumb borrowers, I don't care who gets whooped or who goes bankrupt -- they took their chances. I also don't care if some of the good borrowers and lenders want to extend helping hands to the dumb ones, as long as it's voluntary. What I don't want is some porkfat pol, with populist majoritarians in tow, stealing from the careful borrowers and lenders to subsidize the dumb ones -- that's immoral and causes inefficiencies, i.e., troubles for future good lenders and borrowers.
Strawmen are so sweet to attack.
Keep at 'em lady!
"By the same token, however, I can't really buy the argument that people who made stupid decisions about lending money perpetrated some kind of moral outrage on the borrower that renders any obligation to repay them moot."
First of all, I'm not aware of anyone on earth except maybe a handful of comment trolls who has actually made such an argument. I mean, for 50 bucks I'd be happy to dress up in a straw suit and argue this point on bloggingheads with you, if you like, but your stirring defense of bourgeois values against shadowy, nefarious moochers and shirkers really doesn't seem to have much bearing on the actual bailout plan, which does not render any obligation borrowers have to repay their debts moot.
The relevant questions are:
1) Whether a greater share of the blame lies with individuals who took out individual loans based on faulty assumptions about a market they didn't really understand, or with massive multinational corporations who deliberately adopted a business model based on faulty assumptions about a market that they were paid large amounts of money to understand, and pioneered lending practices that were clearly exploitative, because it was good for business in the short run.
2) Whether each side's relative share of blame, suggests that the government should take steps to ensure that the bailout funds benefit borrowers as well as lenders.
3) Whether even if you think the stupid, greedy buggers who borrowed money unwisely ought to suffer, you think it is of greater benefit to all of us if steps are taken to reduce the foreclosure rate in order to mitigate the economic harms caused by the FUBARed market for mortgage-backed securities.
I understand that many of the people opposing the homeowners bailout also opposed the bank bailout. But given the relative scale of the bailouts and the relative levels of outrage, some of us have started to suspect that this is less about defending sacrosanct bourgeois values of thrift, etc., and more about making sure the proles suffer to teach us all a lesson.
I grasp you general point but I think that couching it in the language of moral obligation is not the way to go, given your theoretical priors. Contractual obligation in the sense you describe is nothing more than the advantage of the contracting parties plus the coercive force of the state. To generate duty and moral obligation is tricky theoretically and I won't pretend to know how it arises, but it certainly doesn't work for purely economic models of human beings.
I'm not sure I understand the point of this post. That its morally reprehensible to borrow money you can't repay but okay to lend money you the borrower can't repay? I'm not convinced - the latter is historically known as "usury" and is widely frowned upon.
Additionally most of these defaulting mortgages are non-recourse loans. That is, the borrower agreed to give up the house if he couldn't pay, and the lender agreed that that was his sole recourse. To me that changes the moral picture quite significantly. The lender had an obligation to himself (or more precisely to his shareholders) to make sure the risk of being stuck with the asset in place of the repayments was acceptable. Quite clearly they did not take this obligation very seriously.
The borrowers only obligations were to pay or surrender the house. Someone stuck with a worthless McMansion on a piece of desert outside LA who's up to date on their payments should try voluntarily surrendering their deed and see just how far they get without having to default. My bet is the bank would fight it tooth and nail.
So let's say I sign a contract to provide x tons of steel to a customer. After the contract is signed, the price of steel plummets. It becomes cheaper for me to idle my factory, breach the contract, and pay damages than to fulfill the contract. This is because damages are set to equal the amount it would cost the customer to replace the steel I promised to provide. So basically it's cheaper to buy x tons of steel than it is to make it myself.
In the McArdle view of the world, I signed on the dotted line, and I have an moral obligation to supply the steel. Sure, I could breach my promise and increase overall wealth, but that would be morally reprehensible.
Oliver Wendell Holmes had a different approach. Holmes viewed contracts as options: you perform or you pay damages, and you do whichever makes you better off. This allows the concept of "efficient breach" - when you can make everyone better off by breaching, society should make it worthwhile for you to do so. To Holmes, your only duty is to perform the contract or pay the contract damages.
I'm sympathetic to the Holmes approach. Most legal contracts don't have moral content. My customer doesn't care if I breach - and my customer knows fully well that if the price of steel drops, or I have problems with my refinery, I may well simply walk away from the contract and pay whatever a court says I have to. When you start to import all kinds of moral judgments into contact law, you end up with people performing on contracts even when it makes no economic sense to do so. Contract law doesn't set damages infinitely high, in part because we want people to breach when the social cost of doing so is lower than the social cost of performing.
So yeah, I think if the homeowner is better off breaching, he should do so. It's a Holmesian world, we're just living in it.
It may be legal to send your lender a jingle-mail, but if too many people do it there's a serious problem.
As an aside I find incredible the number of people who feel no moral obligation to repay a debt. If we ever get together and order a pizza you people are paying cash up front.
Actually, I was just reading a legal decision in which the parties had stipulated some of the issues (involving a commercial dispute), and had stipulated a cap on damages of $x. The plaintiff won on the remaining issues, and damages were higher than $x. Now, let's say you're the defendant. Are you morally obligated to pay more than $x to the plaintiff? And if not, why not? Your ability to pay only $x and be done with it is a result of a bargained-for limitation on the plaintiff's recovery. How is that different from setting x = "my house"?
I've got next Tuesday in the Suderman-hangs-himself pool.
Um, there are actually plenty of investors trying to buy these investments. The banks don't want to sell, though, at the prices the investors are asking.
And saying that investors hate "uncertainty above all things" doesn't actually reflect reality, either.
I wonder if Megan would think that the same sentiment that you have a "moral obligation" to pay your mortgage (even when the terms of the mortgage suggest otherwise) extends to the promises of (say) GM or Ford to pay their retirees a pension?
Funny, amongst all the talk about how the US automakers should stiff the unions, I never heard her say that one factor pointing against that was that the companies had a "moral obligation" to their pensioners.
Funny, amongst all the talk about how the US automakers should stiff the unions, I never heard her say that one factor pointing against that was that the companies had a "moral obligation" to their pensioners.
Huh? Most of the commenters I read here on posts on that topic agreed that GM does -- the taxpayers, however, don't.
As an aside I find incredible the number of people who feel no moral obligation to repay a debt.
I feel a moral obligation to pay my debts, but everyone has a price. When do you throw that moral obligation out the door, and act in your best financial interests? $100,000, $200,000, $1,000,000? Would you give up all the money you hope to make in the next 30 years to pay off a debt? Secondly, IMO if you give the house back to the bank, don't try to stall foreclosure for free rent and don't trash the house you've met your moral obligation on the mortgage.
"That its morally reprehensible to borrow money you can't repay but okay to lend money you the borrower can't repay? "
A lender that lent money to people knowing they would default would be even more blockheaded than the real ones we have now if that is possible. Why would you loan people money to buy a house knowing you would be subjected to weeks and months of foreclosure proceedings only to end up with a house you don't want and aren't in the business of selling, assumedly knowing that the market was soon to be flooded with any number of you and your coherts new homes, hopelessly beating down their prices putting YOU under water with them?
Does that sound like a likely business model?
Did lenders and realtors play fast and loose with some err... unadvanced people unable or unwilling to understand what they were buying into? Sure, partially with the not so gentle prodding of Congress. Did they know or expect most of those people to end up upside down and hopelessly underwater on those loans? Not unless they enjoy being unemployed and wondering about keeping their own homes.
I'm not sure I understand the point of this post. That its morally reprehensible to borrow money you can't repay but okay to lend money you the borrower can't repay?
SimonK: there's obviously a difference between "can't" and "won't." I don't see any moral issue at all involving the former, unless there was a conscious effort to deliberately take on more debt than was possible to pay back. If you can't pay you can't pay. That's no sin.
IMO if you give the house back to the bank, don't try to stall foreclosure for free rent and don't trash the house you've met your moral obligation on the mortgage.
You've fulfilled the legal obligation. But not the moral, I think. Mind you I don't think it's a huge moral crime. But the way these contracts are written (somebody correct me if I'm wrong) is that you 1) promise to pay the money back; and, 2) if you don't do so they take the house back.
In other words, it's not as if the contract gives you the option of either paying or, if that's a drag after a few years, giving the house back.
IMO not paying the money back when you have the ability is therefore breaking your word. Not paying it because you cannot do so isn't.
I wonder if Megan would think that the same sentiment that you have a "moral obligation" to pay your mortgage (even when the terms of the mortgage suggest otherwise) extends to the promises of (say) GM or Ford to pay their retirees a pension?
Corporations can't have moral responsibilities, because they are inanimate constructions. The people that run them can, of course. If GM goes bankrupt its going to be a whole bunch of different people owning and running the show, with a whole bunch of different obligations (to the shareholders, also pensioners lets not forget).
Or if you insist on playing your way, doesn't UAW have an obligation to the shareholders (again including pensioners) of GM not to put everyone out of business and destroy the stock value?
When do you throw that moral obligation out the door, and act in your best financial interests? $100,000, $200,000, $1,000,000?
Me? I never "throw that moral obligation out the door". I pay all my debts, even those that have become a gross inconvenience. If it just became impossible for some reason (sickness, say, or someone invents an AI that can write software), I would pay back as much as I could.
Seriously, you'd jettison your moral obligations for your "best financial interests"? Of what value are morals that are ignored when they become inconvenient? If your parents become a financial burden will you throw them out on the street in pursuit of your best financial interest?
Really? Then why don't you post those quotes? I certainly don't remember any great wave of this sentiment you claim the majority voiced.
What is this 'moral obligation' thing? Is that a "free market" thing?
No ... and yes. The moral obligation of honesty and respect for others' property and person is more fundamental than the concept of a free market.
But a free market couldn't function without at least some honesty and respect for others' property and person. A free market also allows this respect to be more fully realized than a coerced economy.
Huh? Most of the commenters I read here on posts on that topic agreed that GM does -- the taxpayers, however, don't.
During prior bailout discussions involving how GM or Ford needed to screw the unions if they wanted any government money, I never once heard Megan say "wait a minute, those companies have a moral obligation to their pensioners, and we can't be asking companies to renege on their moral obligations as part of any bailout." If she did say this, I stand corrected.
Or if you insist on playing your way, doesn't UAW have an obligation to the shareholders (again including pensioners) of GM not to put everyone out of business and destroy the stock value?
I assume there is no contractual obligation imposing a duty on the UAW to ensure shareholder value. But in any case, I don't have any problem with the automakers revisiting their union agreements if circumstances change so that it makes good financial sense to do so and suffer the legal consequences. I also don't think that there is any obligation to pay your underwater mortgage if you don't want the house anymore and are willing to take the credit hit. In fact, I think that if you are paying tens of thousands of dollars a year needlessly on said underwater mortgage, you likely are doing a disservice to your family, which would be better off if you walked. I mean, what would I tell my daughter in 16 years -- "sorry I spent your college money on a mortgage that was worth far more than the house when I could have walked instead, but that was my 'moral obligation.'" Poppycock. I need to get over my feelings of moral failure and send her to college.
In other words, it's not as if the contract gives you the option of either paying or, if that's a drag after a few years, giving the house back.
That's exactly what the contract says though. Either pay us $X per month, or give us back the house. It doesn't qualify the reasons for why you stop paying the money back. IMO, if you entered that contract with the full intent on paying it back then you were moral in your business dealings. It's also not just a drag on most people, but many people going through foreclosure can't afford to pay those loans back. How does a person who makes $50K a year gross ever expect to pay back a $500,000 loan? 31% DTI ratios are what's affordable over the long haul, 50% DTI ratios are unaffordable and only work over a short period of time.
I think that Ms. McArdle's analogy doesn't work, because it's only $200. It's easy to be high and mighty about morals when we're talking a week's worth of work max. When you're talking about $300,000 lectures about doing what's right and morals don't cut it.
Morality is an emergent process. Your rulebook is out of date.
The audacity of Megan posting something like this on the same day as a post where she excuses Treasury secretary candidates playing fast and loose with taxes is staggering.
Moral Obligation?
What the F#&K is a MORAL obligation?
We are a country of laws. I kill you and I face the consequences. I cheat on my taxes. I face the consequences. I cheat on my husband. I face the consequences.
In the first case, I go to jail. In the second case, I go to jail or pay a fine or whatever. In the third case, it is between me and my husband and, maybe some legal ramifications.
When I was in the Army they said "we can't make you do anything but we can make wish that you did it."
If you don't want to repay Home Depot or the credit card company then don't. You will face the consequences.
If you don't want to pay your mortgage then don't.
People back out of moral obligations all the time. People back out of legal obligations all the time.
Our laws and society should be set up so that people have incentives to do "the right thing". We can't force them to do it but we can make them sorry they didn't do the right thing.
Bingo!!!!! You see that folks? What Mark is describing is exactly what a lot of people thought when they took out those loans.
Please note Mark's rather obvious political inclinations.
See, here's the thing, what Mark is describing used to be true. But around the turn of the century, this model was replaced by many businesses with selling the paper and moving the risk on down the line. Why should the loan originator care if you default if they're not the ones holding the mortgage?
The problem is, the people taking out those loans didn't realize this. They honestly thought - as Mark says - that operating in this way was not the soundest business model.
Questions: should the borrowers have known this crucial fact? Should those involved in the process of making these loans informed the borrowers that this was the case?
I'm surprised that you haven't discovered more of the joys of outdoor cooking. Though its harder to do it when you rent and a lot harder to do it up north. The grill is just a start, you should invest in a smoker....then default on your loan, its all the rage these days.
Of course she didn't. But you'll still have people who will claim that she did, or that they did . . . and then refuse to post any backup quotes.
I think it's pretty obvious that Megan is, er, rather flexible in the morals department herself.
If we don't stop grill prices from falling, this economy may never recover.
Small correction:
In the second case, I go to jail or pay a fine or [become U.S. Secretary of the Treasury].
Scent,
Who ever argued that a profitable company doesn't have an obligation to pay its bills? I'd like to see some quotes.
When we were talking about GM we are talking about a company that is loosing millions of dollars every hour it remains in business.
The question isn't about those who can't pay - the question is about those who can pay buy chose not to.
If GM could pay they would, the fact is they can't. Seriously, who ever argued they shouldn't pay if they could? Please - I need some quotes.
Translation: after scrolling through those threads, jmo couldn't find even one person on his side who mentioned anything about the union's moral obligation to the pensioners.
Is anyone surprised at the lack of consistency? Anyone at all?
Was the credit card company DYING for you to borrow for the grill, pleading for you even to pay $200 for the $100 grill because they could then parlay it into 20 x $200 in sales of loan based securities? Yeah that grill is worth $200. Everybody knows that. Don't even tell us how much you make that grill is so golden.
If not, the analogy utterly fails.
The real point is that our economy needs to be, and now will be, totally reconfigured because it has been based on false assumptions similar to the above for almost 3 decades. What is all this crap really worth? We'll know soon enough after a lot of weeping and gnashing of teeth.
I've read this thread from top to bottom and still cannot figure out where the moral component comes into play.
You buy a house through some combination of your cash and a loan. The mortgage specifies a payment schedule and outlines rules for defaulting. Shit happens. You decide that you are better off defaulting and exercise that clause in your mortgage.
It's all in the mortgage documentation, people. They give you money and you give them the authority to foreclose on the house if you don't pay it back in the specified manner.
Felix's mortgage says that if he doesn't pay, the bank will take the house. What's morally wrong with Felix mailing the bank the keys and walking away?
What's morally or ethically bankrupt about this?
OK, so Megan didn't read the Marc Gimein post that Felix Salmon referred to, not surprising, Megan would rather rant than do her homework. No doubt Megan has to produce a certain number of words a day lest she wind up unemployed like her boyfriend. So we get the post above, ranting about a Felix Salmon post and completely missing the point that Marc Gimein referred to in his blog post which is that if you're in a contract with a lender that says "if I don't make payments on this asset you may seize the asset, but not go after the rest of my assets" then you have, if you stop making payments on the asset and allow the lender to seize it, fulfilled the terms of the contract. The fact that this situation is wildly different than the situation with Megan buying her outdoor grill either didn't occur to Megan, because she's dense and/or ignorant, or did occur to her, but was ignored either out of the desire to create a straw man argument, and thus generate her daily word quota, or because she's intellectually dishonest.
Megan, don't you feel any obligation to The Atlantic to provide them with some quality work for the money they're paying you? I mean do you think you would have been hired if they had known that you were going to post extensive rants about your boyfriend, your drama in trying to get your auto registration renewed, your experience with Sears Roebuck, etc, etc, etc, etc, etc?
[quote]I take a very Old Testament view of people who default on debt, because defaulting on a debt is not much different than outright thievery. I don't see the moral difference in stealing money from someone and borrowing it with no intent to pay it back.[/quote]
The Old testament view was that if you foreclose on people unable to pay you back, you are sinning against God. The Old Testament view is that every 49 years, you forgive debts owed to you , and wipe the slate clean.
Read your Old Testament before you claim anything about it.
http://www.biblegateway.com/passage/?search=leviticus%2025:8-25:11&version=31
"So yeah, I think if the homeowner is better off breaching, he should do so. It's a Holmesian world, we're just living in it."
Fair enough - but should the gummint be in the business of making it easier for him to do so? Of re-writing the rules so as to lower the damages the homeowner must pay? Of using MY money to help him screw the lender?
I think the magazine looks at Megan as someone who generates large numbers of hits. That the hits are mostly generated by either gawkers slowing to gape at the twelve-car pileup or by Randboys swerving by is of no particular concern to them as long as they grab eyeballs.
That last was in reply to Quixote, btw. Curiously enough, I don't think Megan realizes what she's really here for; I suspect she thinks she's really 'econoblogging', which despite the way it looks doesn't have a double meaning for her.
There is a difference between can't pay and won't pay.
In the linked article Felix can make the payments. He's underwater, though, and owes far more than the house is worth. His wife wants him to walk. His equity, a large cash down payment, has evaporated.
He promised to pay a certain amount of money, plus interest, for the house. He can still make those payments, at least for now. Should he? That is the question.
Ethics are the rules you follow because they are right.
Morals are rules the community wants you to follow.
Law is the set of rules you follow to stay out of jail.
He promised to pay a certain amount of money, plus interest, for the house. He can still make those payments, at least for now. Should he? That is the question.
He was basing affording the mortgage based on his minimum option-ARM payments. This has caused negative amortization and caused his loan balance to increase from $300,000 to $350,000. When this loan recasts into a fully amortized $350,000 loan over 25-years will he be able to afford it? It could be better financially for both parties if he hands the keys over to the bank before the house depreciates more and he pays more interest to the bank. If there's no way he can afford the recast payments in a year, why is it immoral to leave now?
The evil corporations made me buy all of this stuff with my credit cards. They also made me smoke and drink with their slick advertising.
Don't you understand that we are addicts and can't control our appetites? We must be taken care of by the government.
I agree there is a moral obligation to repay money one has borrowed. However, to be fair, your analogy between a credit card and a mortgage falls apart as soon as you read the terms of the respective borrowing agreements. The unpleasant truth is that in most states, from a purely legal rather than moral perspective, every mortgage came with a put option. The bankers knew damn well that the mortgages were non-recourse.
Everyone in business knows that when you do a non-recourse business loan you are going to be laughed at if the borrower fails to repay and you try to lecture him about the morality of what he's doing - it's not personal, Sonny, it's business.
What has happened in this downturn is that - surprise! - when they need to, individuals can start acting like businesses. The put option was there all along. You didn't expect them to use it but the risk was there and you chose to ignore it so you could make money selling the loan. It's not that much different than an insurance company - a mortgage insurance company, say - mispricing its policies.
It's not personal, Angelo, it's business.
Well the whole vegetarian thing makes the grill a pretty nutty purchase, since grills are for meat. Still, if you can overcome that I have 2 recipes that will make you grill a joy (whether you pay for it or not is between you and the bank).
A) Sharwood's Curry/Tandoori whatever powder. There is a recipe on the back. Use yogurt and chicken thighs with the bone in.
B) Grab a pork tenderloin and smother in any one of a billion honey mustard type things. Grill.
Easy and delicious. The first takes time as your best move is to put the mixture and thighs in a big plastic zippie bag overnight in the fridge.
Screw going Galt, the original post and the accompanying comments have convinced me to go Lyman.
Life is too short to indulge in this superficial, mindless, and ultimately pointless bickering.
Later folks!
BTW, there are such things as full-recourse loans. They are called personal loans, and the interest rate on them is WAY higher than it is on mortgages, and that kind of loan is WAY harder to get than a mortgage. Believe it or not, before they give you a full recourse personal loan, they actually look very closely at your verifiable income and assets.
There's no such thing as a no-doc, neg am personal loan. How about that.
McArdle's positions are not very consistent. She thinks it is fine to use your legal right to declare bankruptcy to avoid paying your debts but is horrified if you use your legal right to walk away from a nonrecourse loan to avoid paying your debts.
"Would you give up all the money you hope to make in the next 30 years to pay off a debt?"
Heh. It's called a 30 year self amortizing mortgage, and people do it all the time. And, after all, they're not giving up all the money they hope to make, unless their housing expense is a lot larger than most people's.
Wherein Megan deep-sixes her credibility for good this time.
Very philosophical thread, lot's of ethical analysis, quantification of moral hazard, weighing of comparative commitments and determination of responsibility. Lots of discussion of who to blame, what not to do, what not to allow.
There's a lot of anger here, but I suspect it's mostly fear. If we can say who is at fault and how we can punish them, stop them from doing that and the rest of us can go back to normal.
"They" didn't do it, "they" can't be stopped, and "they" can't fix it. We did it, we have to stop what we've been doing and we need to agree what we are going forward to.
I still don't understand how you can be so high on bankruptcy when you oppose doing to mortgages in bankruptcy the very thing that bankruptcy does with all other secured debts. Either it's a great system and so should be applied to mortgages, or it's not a great system.
Whenever I read americans going on about how justified they are in not paying their debt, I wonder if any foreigners who own government debt reconsider the risk in continuing to lend money to such immoral fools.
Keep going. The interest payment will hit $1 trillion within two years if there is the slightest doubt of the solvency or willingness to make good on government debt.
After all, the US government represents the people of the US.
I wonder if there was a proposition put to the american people about whether to continue to pay interest on the debt incurred by the government, which way the vote would go.
Derek
"I have an moral obligation to supply the steel."
No you have a moral obligation to honor your contract. Mortgages often have no escape clause other than foreclosure - what I think Megan was complaining about was the way many liberals are blaming everything on the lenders and talking about bailing out the buyers or forcing lenders to write down loans and so on.
I have no real problem, and rather doubt Megan does either, with allowing borrowers to default and lenders foreclose or letting them voluntarily work out new agreements. The problem is letting the borrowers get away with not paying their debts, either by meeting their mortgage payments or by losing "their" houses and taking the hit to their credit rating (reputation).
I finally got around to reading the linked article.
Felix has more invested in the house (he paid $300,000 down) than the house is currently worth ($270, 000) and has another 1 year interst only plus $350,000 at the end of the year to pay. In this situation, unless he thinks that the house will eventually regain its value, I agree, if the lender will not modify the loan, walking and letting the lender foreclose is the only rational choice.
Megan should have chosen a more typical (unless this is typical, which it doesn't sound) situation to link to. I mean, if he walks he is taking a bigger hit than the lender, even without a foreclosure on his record.
billswift: if he walks will he ever get another mortgage?
I worked with a fellow who had a home in a resource town, the jobs dried up and he had to leave to find other work, couldn't sell his home since everyone else was leaving at the same time, couldn't support two dwellings, so he defaulted on his mortgage. He rented for the rest of his life.
Ironically, the town was Fort McMurray. Look it up.
Derek
billswift: if he walks will he ever get another mortgage?
Well, just about everything drops off one's credit report after ten years, so, yes, I'm pretty sure he could get another mortgage. Probably a lot sooner than that.
THE FULL RECOURSE LOAN
Our society would be a far better place if lenders were allowed the full recourse loan.
In this legal framework, if you choose not to pay a debt, the creditor has the right to break down your body into its constituent organs, which can then be sold into the international black market.
In Megan's case, if she didn't want to pay for the grill, Home Depot would probably seize her kidney. She would end up with one less kidney, $200 debt erased, and $9,800 store credit at Home Depot.
...
This framework benefits everyone - loan rates are much lower - since the risk of default is hacked way down.
ScentOfViolets, are you employed? Out of curiosity, how much time do you spend daily, on average, at this site?
The reason contracts are drawn up is to clearly communicate each party's obligation. If the contract states that a default obligates the borrower to give the house back, and the lender has no further recourse, then that is the extent of people's moral obligation.
Having bewen involved in several thousand contracts, nothing irritates me more than some meathead, be it a borrower or lender, claiming some sort of extra-textual right, or the right to impose some sort of extra-textual obligation beyond what was agreed to, or what statutes demand. Why the hell did they think the contracts were printed and the statutes published? Because people had nothing better to do?
The reason contracts are drawn up is to clearly communicate each party's obligation. If the contract states that a default obligates the borrower to give the house back, and the lender has no further recourse, then that is the extent of people's moral obligation.
Having bewen involved in several thousand contracts, nothing irritates me more than some meathead, be it a borrower or lender, claiming some sort of extra-textual right, or the right to impose some sort of extra-textual obligation beyond what was agreed to, or what statutes demand. Why the hell did they think the contracts were printed and the statutes published? Because people had nothing better to do?
If the loan contract has an opt-out clause (as a home loan in California must), didn't the buyer pay more for the loan to get that option? So how can there be any moral component to exercising that clause? If the buyer had insurance and the grill or house blew up, would it be immoral to try to claim on the insurance? What if the buyer didn't need the money?
I simply can't believe the know-nothingness of theis piece. Yes, people obviously have an obligation to pay back their loans (was anyone questioning this?), but society as a whole has a duty to look after those in need otherwise the result will be an increase in the homeless and the destitute. A house is not a grill!
Another silly article for a conversation that's been had a million times. Nobodies denying these people have the obligation to pay their debts.
You, like Erin Burnett ma'am, are making up neatly fit scenarios to fit your bias and writing whims.
k1
The financial crisis could be resolved if Wall Street thought there was going to be some accountability; instead we have the same group of corrupt Democrats who caused the mess in charge of policing the system.
If we started by prosecuting Dodd, Frank, Waters, Raines, Gorelock and Johnson, all of whom personally profited by exploiting the system and blocking reform (some to the tune of tens of millions of dollars), the market would react very positively.
If that didn't work, we'd have to move on to prosecuting Kerry and Obama for their roles in contributing to the crisis.
There is no way to tax a corporation. Thus corporations have a monumental advantage over individuals.
Despite this little hiccup with the deflation of corporate assets their percentage of all assets will continue to rise. So too their dominance of government.
-------------------------------------------------
As Goldman Sachs was buying large amounts of mortgage Credit Default Swaps in 07 08, as a pure speculation as opposed to hedging their long MBS position, their former CEO Treasury Secretary Paulson was assuring people that the problem with sub prime loans would be minimal. You know the rest of the story. GS got paid off on their speculation as the Treasury supplied the money to AIG to settle on their swaps with GS.
We can only hope and pray that someday GS will not be forced to pay taxes on such profits.
Well enough of that. Let's talk about moral bankruptcy and individualism, with perhaps issues governance thrown in.
Megan says: "Whenever you default, you are taking money from some person: a shareholder, a creditor, an employee who loses their job when the corporation is liquidated."
Yes. Call me when the CEO's of Countrywide, Merrill, Citi, Goldman, JPM, and the others a) don't get bailed out of their bad decisions, and b) become responsible for some criminal or civil liability for what they have done.
Until then, let's remember that creditors and debtors renegotiate terms of debt all the time, and those negotiations, like all negotiations, pivot on the relative political, economic, and strategic strenghts of the players.
If pathetic BBQ buyers band together to develop clout, so be it. Credit card companiers, banks, investment banks, insurers, etc, have lobbied together to have lawsa rewritten and they have spent their respurces to win court cases to shift termns in their favor.
The cry of morality is often the refuge of the party on the short end of a power relationship. The banks are crying morality while their common shares are sinking to zero.
Cry me a river.
But I fully favor extending unemployment benefits for the Jamie Dimons who by all rights ought to be out of their jobs . . . and would be if they weren't being bailed out and allowed to escape from the consequences of their poor decisions.
"And, as always, Megan wants to frame questions to the benefit of corporations."
What’s wrong with that? Consider an analogy. A college like Antioch that is run entirely by leftists is about to fold because they made too many bad student loans. Who do you side with, the borrowers or the lender?
"How does a person who makes $50K a year gross ever expect to pay back a $500,000 loan?"
Why did such a person take out that big of a loan in the first place? OK, they did apparently, and that’s that.
But for the future, can we please, please educate people about mortgages in our schools? Everyone who gets beyond the tenth grade should know that borrowing that much money with so little income, even if the bank says you can, is a very bad idea.
Having been involved in a great number of contracts as well, I don't so much get annoyed as get worried when a contract I've written gets loopholed by the opposition. Drafting unambiguous contracts isn't easy and even when everyone in the room agrees on what the document represents and that is clear and understood, some fucker can claim differently later--usually as a result of changed circumstances. I'm lucky in that I'm small time (at least in this limited example--the downside being I have less leverage to extract rents) and few things (hell I don't think a single contract I've drafted) actually gets litigated. The parties tend to (wisely in most cases) just change the contract. Business relationships are important and people generally are willing to renegotiate rather than litigate. Obviously this is different in the world of buying houses where the transaction tends to be a one off (promoting a classic game theory strategy of defection). One strategy that leads to a better win/win outcome is the notion of reputation--people talk and so a one time transaction becomes like a "relationship". This is why credit scores were such a great invention. You can create a metric for reputation. The downside is that one you have a clear metric you can automate the process and the automated process is easily gamed. Still, I think the jury is out on these efficiency improvements. Redundancy is the enemy of efficiency and in the long run it is pretty hard to figure out whether one should waste today's productivity in order to protect against a potential sigma 8 event.
I should add that the obvious problem with risk is that there really aren't a lot of good ways to know what sigma an event is in certain realms. Hence Burkean conservatism.
Will: I live and work in a small town, and see people with your attitude show up and try to do business. They last about a year, then have to move on somewhere else, preferably a big city where reputation doesn't matter.
I'll give you an example why.
What I do for a living generates invoices usually from $1000 to $3000 range. Rarely is it possible to give an estimate, typically because by the time I can estimate precisely, 3/4 of the work is done. The end results are variable, because often working with existing systems that may or may not have ever worked. The field is ripe for abuse, and few who enter the business are successful.
If a person decides not to pay their invoice, there is a legal process in my jurisdiction that essentially costs $10,000 and three years before any action can be taken to collect.
Anyone who is a lawyer, or a business person from elsewhere pays up front.
In any business transaction, what is exchanged is trust. Ultimately, my skills are meaningless unless people trust me. Wall Street deal makers in the last few years forgot that they weren't dealing in bonds or some acronym, but trust, and that is lost for a generation.
So yes, you are absolutely right. I hope that if I ever run into you or someone like you, I have the skill and sense to not work for you.
Derek
"It's a nice grill. But I've since realized that our landlords have an old, broken grill that we might have been able to repair with enough duct tape, saving me almost $200. Meanwhile, I've discovered that I can't sell the grill for a profit, because Home Depot seems to have a large number of very similar grills in stock which they are willing to offer to buyers for a mere $200. For that matter, I can't even sell it for the value of the loan with which I financed it. The equity in my grill has dropped by about 50%. Given all that, I don't see why I should be required to pay back the credit card company. "
Your grill analogy does not present the entire context of the situation, though.
Let's add a couple more pieces:
1. Unlike a typical credit card purchase, your $400 loan is secured by the grill (which is, unfortunately, now worth only $200.)
2. Unable to meet your financial obligations, you have filed for bankruptcy.
Where does that leave your lender?
He cannot get $400 from you, because you do not and will not have $400 to give him.
He can, of course, repossess the grill and re sell it, but he cannot sell a used grill for $400 when a new one can be had for $200. At best, he can sell the grill for $200, but he would also have to assume the costs of re-acquiring and refurbishing the grill. Figure he's got a guy who will do it for $20 (recession and all, and the guy needs work). Great, the lender can recover $180 of his $400 loan - assuming, of course, that grill prices do not continue to fall before he can make another sale.
Now, what if, in the course of your bankruptcy proceeding, you would actually be able to keep the grill - if the principal on your grill loan was written down to $200? What would be wrong with allowing the bankruptcy judge to do a cramdown?
Seems as if it could be the best solution for all parties, including the lender, since the lender would never his $400, anyway.
I think Megan, and most of the posters here, have a vast knowledge of economic principles. All of you probably acquired that knowledge from your parents, a mentor, or college educations. The problem I see with this post is the difference between the rather simple purchase of a grill on credit and, for a large majority of Americans, the complex financial instruments used for large purchases and wealth generation.
Posters here at least have an above average knowledge and understanding of these things, but your average American certianly does not. Now, I do believe when you sign your name you have a contractual/moral obligation to live up to the terms you have agreed to, even if you find you have made a bad decision. However, we're not talking about $200 here, we're talking hundreds of thousands of dollars. It adds up rather quickly when so many people made so many bad decisions. To me, that means there's a problem in the system somewhere. Is it moral? Is it ignorance?
I think it's ignorance on behalf of many Americans (not saying this as if most Americans are stupid, they simply didn't know any better). The situation we are faced with now is the result of millions of Americans not being educated on economic principles and complex financial instruments. I don't think everyone who got in trouble on these loans really didn't care whether they defaulted, I think they really didn't understand what they had gotten themselves into. And the massive amounts of wealth that has been lost can not be made up by just taking their homes away, the appreciation rate of homes couldn't have been lost on banks and lenders or even appraisers...nobody wins on a scale as large as the problem we face.
There should at least be an attempt to make the landing softer rather than a full nosedive, so in that regard I agree the government needs to step in.
Talking about moral obligations in contracts isn't helpful, it just distorts things. Signing a contract isn't a moral obligation to do anything its just an option to pay damages instead of fulfill your obligation.
As Oliver Wendell Holmes said, "the duty to keep a contract means that you must pay damages if you do not keep it,- and nothing else...even though such a mode of looking at the matter stinks in the nostrils of those who think it advantageous to get as much ethics into the law as they can"
@Jake
I think Megan's point it that the classic zero morality modern view of contract law is wrong. I disagree with her but I think that's what she is saying. Plus she didn't go to law school :P
@ Derek
Obviously I agree with your facts on the ground scenario. But in the real world people aren't always presented with optimal choices. I'd work for Will. Are you hiring Will? Will you hold my tier 4 JD against me?
The bigger point is that she's being inconsistent. This happens with her a lot; in making a defense of the conservative issue du jour, she often contradicts previous positions. Here, for example, she is at variance with her stated opinion on the UAW's obligations with regard to benefits for pensioners. Not once did she ever refer to a 'moral obligation' on the part of the members of the union to honor a contract with retirees.
One or the other, but not both. Indeed, this is why most people think that Megan doesn't really have a coherent position other than to promote the usual conservative interests and preoccupations. Certainly it's the more parsimonious explanation - and a more comfortable fit to boot.
The mightypuck: when all you have is your good name, and in a tough job market that is all you have, it's worth something. I mentioned upthread a co-worker that lost his house due to circumstances he couldn't control. Nasty situation, bad choices. He had to rent the rest of his life. I also know someone who was screwed on a project he did, didn't get paid, but he paid his workers, paid his suppliers, and worked for a number of years to pay off what he owed. The guy who screwed him had no such compunction. And another fellow who was caught in an economic downturn with a newly purchased business, payables to his suppliers. He ground his way through it and kept his good name.
We are all responsible for what we do. Life throws nasty things at us regularly, and in the end what matters is what we are as humans. The individuals I mentioned above did those things not as unusual or out of character. The first one had a friend who was severely injured in a work accident, on the edge for most of a year. He travelled 8 hours one way every couple of weeks to visit him in hospital, and probably helped his friend survive. So paying his obligations was just who he was.
Jake: you don't know what you are talking about. Moral considerations always enter into the picture. Otherwise the IRS would be doing house to house seizures instead of the current trust based operation.
Derek
The social cohesion/capital formation theory of the moral dimension (ie contra that devastating Holmes quote above) requires that the parties not feel in retrospect that they were tricked in any way. I realize Megan rejects that case for nearly all consumers (though she seems to entertain the notion that we are all so ingenious at concealing our true financial situation from lenders so as to effectively have the ability to trick them into offering is more money than is in their interest to, but leave that aside), but adjudicating those claims is beside the point. You can't enforce top-down-wise (ie from a superioristic moral position) the moral desire in someone to pay her debts where she does not feel such a desire. In this way, lenders made their own bed. Only the most foolish professional (or, as someone above said, one-off) loanmaker would conduct business based on the assumption that their debt would be treated with the same reverence by the borrower as that of one's own sister, say, or even as that of a trusted long-term business associate. At some point, this social fabric view becomes just a little precious; can we please admit that at some level of social remove or other we will each accept that the law of the jungle (which for domestic transactions is just to say, "the law") is the operative constraint?
MM,
125 comments later, if nobody has, yet, pointed it out:
You are such an Establishment Stooge.
Any hackneyed "moral exercise" you can scrape up/have delivered for your posting, You, as faithful Servant, are right there to deliver.
Too bad you don't work for the USPS, everyone would be better served..
Sincerely,
Mark E Hoffer.
I agree with Megan's point of view that a contract is a formalization of a promise which you should intend to carry out. The 'letter of the law' is to help the 'spirit' live more comfortably. Actually the 'spirit' is more expansive than the former but it's application depends on the circumstances. I bought a used Chevrolet station wagon from an upscale name dealer years ago. In the first few days i had it, it seemed it would overheat. With small children and a fixed income I was fearful about having to buy a new engine; their representative said he'd 'see that it worked out.' It turned out just to need new 'freeze plugs' as I recall. The U.S is doing a similar thing in honoring AIG's counterparty debts. Our system judged AIG to be a AAA risk. We are standing behind the debts partly in the spirit of that 'promise' and partly because we have good reason to believe that we would destroy lending and freeze the economy otherwise.
See, this is why econobloggers should be economists: an economist would look at the mortgage situation and note the incentives for each party, and see that it's perfectly rational for some people to default on their mortgage they can't afford it and they have no equity.
A crypto-Republican with an MBA, on the other hand, might get all huffy about the sacredness of contracts and compare the situation to a $200 grill, because that's the only thing a middle-class white girl can relate to.
Why is the Atlantic not embarassed by this?
So if that's true, the UAW had a moral obligation not to shuck it's responsibility to retirees, right? And in the larger sense, it is immoral for corporations to seek bankruptcy, correct? In fact, shouldn't the people working for a corporation stand behind it's debts with their personal fortunes? AFAICT, by the system you claim to adhere to, anything else would just be immoral.
Question for the "pro-morality" side: Suppose there are two contracts. The first says:
1. Borrower must pay lender $X per month.
2. If borrower fails to pay, lender takes possession of property P and the contract is terminated.
The second:
1. Each month, borrower must either pay $X, or surrender property P to lender. In the latter case, the contract is terminated.
Is the claim that although the contracts are legally equivalent, the first imposes a moral obligation on the borrower and the second doesn't?
If I owe the bank $1000, I have a problem. If I owe the bank $1,000,000, the bank has a problem.
If Felix owes us all $200,000, Felix has a problem. If 150,000 Felixes owe us $200,000 each, we all have a problem.
Who the hell wrote all these non-recourse loans?
dkite, I've lived in big and small towns and have seen people like you show up, and act as if the agreement they made on paper, and signed their name to, can be superceded by their feelings. These people are children and a real pain in the ass. Which is why I makle a point to go through a contract in very minute detail, to the point that people sometimes get irritated with me, so as to avoid claims that something wasn't understood. I sometimes play devil's advocate and give them reasons why they shouldn't sign it.
Now, as it happens, I have also operated in industries where the speed of transactions must be so rapid as to preclude formal contracts until the product is delivered, and have thus concluded up to 6 figure transactions upon nothing else but an agreement made during a phone call. I've never been involved in litigation, on either side, as a result of such a transaction, and thus know perfectly well the value of reputation. None of this has anything to do with being an grown-up, and thus knowing that when a formal contract has been entered into, that is what explains what each party's obligations are.
Yes, mightypuck, it is damned hard to draft unambiguous contracts, and where ambiguity exsits, people will have legitimate disgareements which will have to be worked out, hopefully in good faith. You are also right about people who have circumstances change, and then suddenly what was unambiguous becomes ambiguous, and your name for such people is not one I would differ with.
In this case we are talking about one party, the lender, typically being much, much, much, more sophisticated with regards to contracts and statutes than the other party. In the states I am speaking of, it is unmbiguous as to what the parties are obligated to do, up to and including after a borrower default; the borrower vacates and the lender takes possession. That's it. To state that the borrower has an additional obligation is to treat the lender like a child, who was not aware of what the solution to a default would be.
Of course, "child" might be a mild description for business people who make a widespread practice of making nonrecourse real estate loans with minimal downpaynments, but I think it more likely that the lenders knew exactly what they were doing, but the perverse incentives were in place, many of those incentives put in place by government,to ensure that whatever inhibitions these lenders may normally have had were completely swamped by the prospect of fast money.
Brian 2: From the Kantian (deontological) point of view, the buyer has made a promise, so the differences between two contracts don't matter. Since there's a promise, morality enters in for both of them.
For the utilitarians (the consequentialists), one looks at the consequences for both contracts to see which results in the best consequences for society. So again morality applies to both the contracts you mentioned.
That leaves divine-command morality. I don't know how they would deal with it, but I don't imagine that they would see one of those contracts as involving morality and the other not.
In general, moral philosophers are going to see morality cropping up just about everywhere.
I'm not speaking for Megan or anyone else on this list, of course.
If I borrow from a friend or family, I have a moral responsibility to pay the loan. If I borrow from the bank and there is a contract in place, I don't see that morality enters into the equation. It's a question of the terms of the contract.
If I'm underwater and the consequences for walking away are less than the consequences of staying, I walk away. It's not as if the bank is going to decide that they have a moral responsibility not to put me out on the street if it turns out I can't make my payments.
To be honest, I think that the idea that there's a moral issue here is pernicious. Morality is a vague and varies greatly across people and cultures. The terms of a contract are typically clear--if not to the borrower than to lawyers and judges at least. It's the contract that lays out what happens if the borrow stops paying. The idea that borrowers have some special obligation in addition to what is specified by the terms of the contract just doesn't pass the smell test, in my mind.
If you're upset that the banks in which you own stock made shitty loans (i.e. you own a piece of those loans), well, I'm sorry you helped finance the madness, but madness it was, and I have a hard time seeing that people who are willing to take the credit hit and and walk away from an underwater loan are making anything but the smart move, and certainly not doing anything immoral.
When the banks made lots of bad loans, they artificially increased the amount of dollars chasing housing. The result was inflated housing costs for all of us. If the banks hadn't been irresponsible lenders, there would have been fewer dollars chasing housing, prices wouldn't have been run up so much and Felix would have been able to buy his house for half of what he agreed to when it looked like the run-up in housing costs wouldn't stop.
If there were a few defaults from time to time and the odd mortgage underwater here or there, you could point to selected borrowers making bad choices and argue that the banking system was doing a good job in the aggregate and these things happen. But the scale at which problems are occurring suggests that we're not just dealing with bad borrowers. Rather, we're dealing with a lending system that thought it could get away with lending irresponsibly if it devised enough instruments to distribute away risk from the initial lenders. And they got so far out of hand that they didn't just screw up the lending system, they undermined our ability to price housing because it became impossible to know what people were actually willing to pay if they really had to pay and really understood what they were paying.
We all know about the borrowers who were using instruments they didn't understand to do things they shouldn't. But the same thing applies to the lenders who were lending to them and the people who thought they'd come up with the magic formula to make risk 100% manageable, hence not really a factor.
Felix isn't underwater because the idiot next door didn't know what he was doing and defaulted. He's underwater because people all across the banking system who ostensibly should have known better made stupid loans, took their commission and assumed that somebody somewhere else knew how to make any potential problems go away, with the result that housing prices were driven not by how much money was available for housing but by how fast banks could print paperwork.
If Felix has a way to walk away and cut his losses, that's his option. If the banks don't feel responsible for the impact their lending decisions might have on their clients' long-term financial health, they shouldn't be surprised when their clients show equal indifference about theirs.
"If the banks don't feel responsible for the impact their lending decisions might have on their clients' long-term financial health, they shouldn't be surprised when their clients show equal indifference about theirs."
This sums it up quite nicely in my opinion. Everybody gets as free ride in this debacle except the homeowner apparently. And if we can't force you to continue to pay in on your bad investment then we'll try to guilt you into it apparently. A scholar of human nature this woman is not.
Best of luck generating sympathy for the banks as more and more people lose the equity in the homes. Should make for entertaining posts if nothing else.
Cannot tax a corporation? How absurd. It is done all the time
and of course the tax is passed on to people. But since in this
case you want the tax passed onto people associated with the corporation taxing the corporation is the most efficient and least paperwork way to do it.
What you cannot tax is people. A person who is disconnected from the financial system in every way is very troublesome to tax. Someone who just hides, eats collected roots, berries and nuts could be tax, but it probably isn't worth it. Taxing that person would be hard. A person who runs a corporation and owns several others, purchases product and services from even more corporations is very easy to tax. On way of taxing that person is to tax the corporations with which they are involved.
Cannot tax a corporation, the proof is in the pudding, it is done all the time.
Overlooked in all of the comments is that has anyone ever seen a loan agreement where there is no recital as to the borrowers solvency and ability to repay?
Presumably every borrower signed the loan agreement stipulating they are solvent and capable of paying.
As a practical matter the lenders should have done their due diligence and and insisted on better evidence of worth and ability to pay. But the reality is the borrowers mislead the lenders when they signed the loan agreement. Fortunately for them,there are not enough jail cells for every one who committed loan and mortgage fraud.
The real victims are those investors who were sold fraudulent securities by the loan resellers.
Interesting that the majority of sour loans and defaults in real estate are only in a few states and those states have non recourse mortgages. The real question unasked is why the feds ever allowed themselves to guarantee those loans to begin with and compel the nation as a whole to subsidize these frauds? As a matter of practicality the borrowers are going to default in mass if they are that much under the water. Nothing will stop that. However there will never be as much credit available again especially in non recourse states. The costs will be a lot higher and the terms more onerous. Immorality does have its costs.
TW Andrews: "If I borrow from a friend or family, I have a moral responsibility to pay the loan. If I borrow from the bank and there is a contract in place, I don't see that morality enters into the equation. It's a question of the terms of the contract. If I'm underwater and the consequences for walking away are less than the consequences of staying, I walk away."
When you talk about the consequences of walking away, which consequences are you talking about? The consequences for yourself only or for all of society? If the latter, then you are engaged in moral thinking, whether you know it or not. And if the former, then you've made a decision to ignore that wider set of consequences, and some would argue that that was a moral decision you made (and a bad one). To keep morality out of it, you would have to argue that the decision you made had nothing to do with morality and that there was no compelling moral reason to look at the wider set of consequences.
Good luck.
When one usually argues with women, it becomes clear that, although they use logic, the are not principally guided by it. Obviously this is a generalization, but it brings to mind our own beloved Irish drink of water Megan.
I completely agree with the assertion that borrowers in default bear moral culpability for their debts in spite of unforeseen circumstances, but why focus on that particular issue?
Of course the Obama administration's proposed fix is silly, counterproductive and fraught with moral hazard. Garbage in, garbage out. But who elected the regime?
There is plenty of blame to go around for the mess we collectively find ourselves in. We are living through the end of the financial structure as a whole and rearranging deck chairs, although a feminine prerogative, is hardly called for at this point in time.
Democracy has failed. We need to find a better way to order society.
I didn't buy a house during the boom. Largely, I was too transient (in a professional sense) to pursue it.
But I was roundly being told I was an idiot for not doing so, for not grabbing some cheap credit and then making "the best investment you can possibly make" - as much property as you can get a hold of. The argument wasn't just that this was smart, it was that it was quintessential to the American dream, etc. I kept renting.
If I had been someone less transient? If I had a family at the time? I would have succumbed to the pressure. And I might be facing default now, or at least a mortgage well under water.
I do not blame the people who were offered more credit than they could afford, because they were offered it en masse. Which means, they were obliged to compete in the housing market against each other. That makes all the difference.
This is America, and here in America people who borrow hundreds of thousands of dollars and then don't repay it are called "victims".
Well, I think that many people are not looking for loan forgiveness. They're saying: "I'd like to work out some way to keep my kids and me in our family home. I'd be happy to work hard to pay off my mortgage. My problem is that I live in a third-world country, where it's very safe to say that a well-educated person like me will not be able to find any work at all for about the next 12 months. Given that I live in such a country, and given that I would really like my kids to have a roof over their heads, would it be possible to work something out so we can stay in our home? Once I'm able to find work, I'll be happy to work my butt off for the rest of my life, and pay off this loan. Just seeing my kids sleep in their own beds will make it worthwhile." Of course I realize there are also many people who simply want their loans forgiven. But when one mortgage in eight is underwater, I think we need policies that go beyond the simple slogan that "if you borrowed money, you should be prepared to pay it back."
Being upside down in your mortgage isn't a problem unless you lose your job and can't maintain your income to pay the payment, and/or you have to move (perhaps for a new job or relocation in a current job).
Housing values are fluid. Just stay put and keep making the payment, if you don't have to move and you still have your job and income.
A lot of the walkaway people with trashed credit will feel very foolish in a year, after the recovery, and their former home is at or above the value they started out thinking it was worth.
Megan:
Never get married, please. If buyer's remorse hits you this bad on a mere grill, imagine the "marry in haste repent at leisure" you'll suffer chained to some man who isn't as shiny as he seemed on the showroom floor.
Also, get your clothes at Lands End. You can return any time, any reason, full refund, no questions asked. Basically you rent your clothes for round trip shipping charges.
Negotiating a deed in lieu of foreclosure without recourse is far more moral than BK and foreclosure with all its high costs. Feed the lawyers, tuppence a bag.
Being upside down in your mortgage isn't a problem unless you lose your job and can't maintain your income to pay the payment, and/or you have to move (perhaps for a new job or relocation in a current job).
Likewise, being uninsured isn't a problem unless you get sick.
I've lost jobs. The point in my life I was closest to buying, feeling the most pressure, and instead deciding on a personal life change, I was with a company that got acquired and generally liquidated about 2 years ago. I would probably be screwed if I had bought. The thing is, I couldn't afford a mortgage at rates that would be repayable if times got lean. And times are lean: housing market crashes usually don't accompany healthy job markets.
Why are so many ready to give a get out of jail free card to the fraudsters who perpetrated this debt accumulation scheme on the public, anyway.
The source of this problem was the financial institutions, mortgage brokers, investment bankers, and money saturated investors. It was NOT borrowers.
Borrowers in this system were guilty of letting themselves believe liars, cheats, and thieves. Their human frailties led them to accept as true the fantasy images that the fraudsters painted for them. When reality intruded, and broke the spell of the snake oil salesmen, they blamed themselves for the moral failing of credulousness, amplified by wishful thinking.
The blamed the SOB's who sold them on going into debt for the utter immorality of using lies, and encouraging lies, to get rich of of their credulousness. They were, and are, correct to do so.
The participants - did I mention banks, brokers, bankers, investors? - who created this system to milk the public, to induce them into going into debt by lying and by formal and very expensive marketing campaigns, and by subsidies to major media organizations who promoted the idea that going into debt was not only reasonable but was the only way to go are guilty of a criminal conspiracy to defraud.
They should be prosecuted. Megan should worry less about the responsibility of people who assumed debt under these circumstances, and more about the callousness, shelfishness, dishonesty, and mendacity of those who induced them to do so.
I had occasion to "assist" by main force (legal action) one homeowner in resisting the blandisments of this system. When the broker who was selling the loan to the owner discovered this, that broker used psychological abuse, lies about me and my motives, direct lies to me about economics and finance, and pressure on the intended victim in attempts to dissuade me.
I knew better - I have specialized knowledge, and experience that permits me to resist such pressures. Not many people do have that advantage. I lived with the consequences to personal relationships that my resistance resulted in until the recent past. Finally, the owner "gets it", and appreciates what I did.
The people who deserve approbation for "moral bankruptcy" are the people who designed, built, and ran this system of organized crime, theft, and fraud for their own profit and benefit. The people they lied and seduced into becoming orrowers do not. Not by a H__l of a sight.
Yes, "approbation" in the first sentance of the last paragraph of my previous comment should be "reprobation" - as in "rejection by God; the state of being condemned to eternal misery in Hell"
This is what happens when you don't buy a Weber grill...
Noah Yetter writes
Yep, I agree.You're talking about the lenders, right?
The borrowers are at fault.
Now that I've gotten that out of the way, so are the lenders. Megan, You're example fails on two points.
Let's change the facts just a little and assume first that a friend wanted to borrow the money from me to buy the grill. I would lend him the money and then if it something happened, we would come to an arrangement or I would lose $200. The reality is that I would or would not still lend it to him because I would know whether or not he was good for it. If I knew he wasn't good for it, I wouldn't give it to him. If I thought that he was, I would.
Now, let's assume that a stranger walked up to me and asked me for the cash. Would I give it to him? No. Why? because I don't know enough about the possibility of getting it back to make that determination. If I felt like making the loan, then I would have to do some form of due dilligence on the person and figure out whether or not I would get anything back or if I would just end up with a grill.
Now let's assume that I'm a bank and it's my business to lend money. Strangers walk in every day and ask me for money. Do I just give it to them, or should I look into them? Do I do some research? Or, as some "lenders" did, should I help them forge documents that would prove that I can pay it, despite knowing full well that they couldn't? I do some due dilligence. And if it shows that they can't make the payments, I don't offer them a different mortgage whose payments they can make but whose payments reset in 3-5 years making the payments larger than the original loan that we looked at that they couldn't afford.
In the end there are two sides to these contracts. One side has the responsibility to pay it back. The other side has a duty to the bank itself to find out enough information to decide whether or not the lendee has the ability to pay it back.
Both sides are at fault.
And as far as your credit card example goes, perhaps the credit card company shouldn't just sign anyone who comes up. Maybe they should be a little more picky about who they extend credit to. Or are they not responsible for their stupid lending choices?
In the end, I agree that borrowers are at fault. In the end though so are the lenders.
"Call me bourgeois, but I think that when you sign your name to a document promising to repay money you've borrowed, you have an obligation to repay the money you've borrowed."
This is what leftists really mean when they say free market economics has been discredited. They just don't want to pay their bills, and they figure some "corporation" (which they seem to think are some sort of fabulously wealthy alien race unconnected with the humans they peer down at through monocles) will suffer the consequences, which will promote social justice.
Do I just give it to them, or should I look into them?
Barney Frank said looking into them would be wrong.
I'm curious at all of the people who think that somehow the borrower is at fault because 'they should have known better'.
How were they have supposed to have known better? To give an example of what I mean, suppose you are offered an insurance policy. Who knows better about the relative payouts of this insurance? The person who's being urged to buy . . . or the insurance company?
I think most people would agree that the insurance company knows far, far better than most customers exactly what the odds are of them living to be a certain age, given the relevant history. Or the actual odds of an automobile accident, again given the relevant history.
So how are the homeowners supposed to know whether or not they can afford a given mortgage? This seems problematic, given that a lot of people here don't seem to know even elementary algebra or basic statistics. In fact, in my particular case, it turned out that the bank did know better than I how much I could afford - and I'm glad they went with their estimation rather than mine.
>Why are so many ready to give a get out of jail free card to the fraudsters who perpetrated this debt accumulation scheme on the public,
>How were they have supposed to have known better?
Lenders for the most part have suffered or are in the process of having their businesses wound up. Banks included.
We probably will see some criminal charges brought against the more egregious thefts and scams.
The way people learn the value of $700,000 is to either have to pay it back or lose everything they have when they thought it didn't mean anything. The best education in business is losing money. One learns very quickly.
Everyone who played the game is at fault. The terrible reality of the situation is that those who didn't play the game, who didn't scam, who didn't sign deals they never intended to live up to are the only ones with any money left.
Is it moral to expect those who had intelligence and integrity to pay for those who didn't? I don't think so.
Derek
I don't know that the buyer promised to replay the loan. What he agreed to was that in case he defaults, the bank gets the house.
So if you default, the bank gets the house. That's one of the options written into the contract.
The contract may say that the bank has this or that recourse in addition, in which case that's true too. But it's still not a moral problem. It's just contract law.
Now, if you get a loan for a house on a handshake, then you have a moral obligation to repay it. The bank was counting on your good character, and so are you.
But in the case of a contract with all that fine print protecting each of the parties, there's nothing moral about it.
I think the "moral bankruptcy" discussion is missing the main point. It's like pointing out that if I receive emergency medical care at a hospital, I have a moral obligation to pay for it. Of course I have such an obligation, and I'm happy to pay high premiums for my medical insurance. But in America today, the issue is more like how many homeless families can the nation tolerate? I saw a few homeless people outside today. Of course, I would say they're obligated to provide some value for having food and shelter. But there's also a question of QUANTITY: how many homeless people is too many? I don't think it would be much fun to live in an America where the ranks of the homeless continues to increase. So while I'm usually not an advocate of government handouts, I do believe the government (and all of us) have an interest in preventing some kind of third-world situation, where families live in shantytowns, while foreclosed condos sit locked and vacant across the street. I'm not saying I know how to solve this problem, but I really think we need to move beyond baby-talk lectures about morals and responsibilities, as if "we" are moral and "they" are immoral. We have a national crisis right now, at least as bad as September 11, 2001. If this continues to worsen, I'm not sure what America will look like in 2010.
They just don't want to pay their bills, and they figure some "corporation" (which they seem to think are some sort of fabulously wealthy alien race unconnected with the humans they peer down at through monocles) will suffer the consequences, which will promote social justice.
Walking away from a house worth far less than you owe is free market economics. It's the people who say they believe in the free market (conservatives) that are whining about it.
Posted by ScentOfViolets | March 8, 2009 1:46 PM
Either an adult is an adult or they are not. But to argue for situational adulthood is a bit much.
Posted by rhhardin | March 8, 2009 5:10 PM
Again borrowers make a specific claim on the loan agreement that they are solvent and capable to repay the loan.
What is interesting is that the bulk of the failures are concentrated in a few states and even in those states only a few counties account for the bulk of the problem. The point being in all of those counties it probably was cheaper to rent than to own a single family home or condo than to buy it for at least 3 to 4 years, maybe more.
In my state and general area it has been that way since 2005 which is why I have rented instead of buying. I have not bought real estate since 2005. As long as it is cheaper to rent it makes no sense to buy which is why I have little sympathy who bit off more than they can chew.
As long as it is cheaper to rent it makes no sense to buy which is why I have little sympathy who bit off more than they can chew.
I don't have that much sympathy for them, many put little into their homes and are now losing them. Many were also just speculators looking to make a quick buck while risking very little of their own money. However, I also have little sympathy for the bank either. No one held a gun to their heads and forced them to not verify income or require collateral for a $800,000 loan.
In a bizarre and counter-intuitive way, the lender is actually taking a moral burden in loaning to you, because they are harming you by allowing you to take on more debt than you should. They are doing it in violation of their own self-interest [...]
Baloney. No bank acts against its self-interest. They make loans they expect to be profitable, and in the era of wildly inflated CDO ratings, they made wholly irresponsible loans in order to resell them. (See, that's what went wrong: "profitable" got disconnected from "will be repaid".) Even worse, they aggressively marketed irresponsible loans to people who should have, but did not, know any better than to accept them. And they did this because it was wildly profitable until the music stopped and there wasn't one single chair left. If you don't get that the lenders were the ones who created this situation, you can't even begin to get the moral calculus right.
If we do want to get all wrapped up in contract law here, it's important to remember that half the contract has already been performed. The bank has lent the money already. Compare these two situations:
1) You contract to sell someone X tons of steel. For whatever reason, you can't deliver the goods. Paying damages is fine -- you make the other side whole by putting them in the same position they would have been in had you been able to deliver the steel.
2) Someone sells you X tons of steel, and delivers it. For whatever reason, you can't honor your side of the deal and pay for the steel. There isn't really any question of damages here -- the only way you can satisfy your obligation is to pay your bill. Or perhaps return the steel in a condition that lets the vendor sell it again.
In the housing case, half the value of the steel has been obliterated for some reason. Maybe it rusted. Returning the "rusted" asset may satisfy the letter of the contract in a non-recourse situation, but the question comes down to this:
Who has the moral obligation to take the loss?
For the actual steel, perhaps one of the parties was responsible for letting it rust. In such a case, it's easy to see where the moral obligation lies.
In the case of housing, though, the loss is in large part due to speculation gone wrong. Nobody made it happen by leaving the houses out in the rain. House prices are just reverting to what they should be for the value of the services a house provides, and the get-rich-quick component of the recent boom has vanished into the air.
Given that the would-be homeowners would have been happy to take the gains on their speculative investments, I think they should bear the losses when the market goes down. If they cannot, then they should take the hit in some other way. Damage to future credit prospects is how our society has chosen to structure this hit, in large part because we think there IS a moral issue here. It's harsh, but that's how risk-reward works. And it's positively benign compared to debtor's prison.
Actually, the Jewish Tradition makes a distinction between straight loans (ie credit card debt) and colateralized transactions (like real estate purchases) which are considered to be simple business transactions. According to this tradition, there is no morale stigma to defaulting on a non-recourse real estate loan, because the borrower would have to give up the home in foreclosure as well as any principal and interest paid in. The reason for this, is that real estate in particular was viewed as signficantly different than other types of business activities and would be highly susceptible to manipulation (limited supply) and could create long term debt penury.
Economic royalists who would rather see people in perpetual debt penury than act as any business might under similar circumstances are not just wrong, they are espousing a deeply unamerican point of view which also happens to be immoral.
Joe --
How does this apply during a widely recognized speculative run? And does it apply to debt incurred to buy other speculative investments, like tech stocks?
That's where it gets tricky for me. I understand your reasoning when houses are simply homes, and even more so when farms are the only means of livelihood for families.
But recently, houses have turned into tech stocks. A lot of people got into them with that very expectation, a position that I don't see as any different from buying stocks on margin. It's people in that boat, rather than those who just want a house to live in, who are most likely to turn up among those able, but unwilling, to pay.
Untangling the morality of speculation from the morality of housing policy is going to be key to sorting all this out. I sincerely hope they never get merged again, because the result is a big mess.
There is undoubtedly a confluence of factors here. The government through its cheap money policy encouraged banks to lend more than they would have and people to borrow. The securitization of debt made it possible for banks who, if they were actually forced to hold the mortgages to maturity, would probably not have made many of the loans. Mortgage interest tax deductability gave all parties involved a powerful incentive to go into debt. Nevertheless, the home buyer has a contact with an escape clause. This escape clause is hardly painless...the home buyer would have to forego any principle and interest paid in as well as have their credit report damaged. At the end of the day however, the banks who made the loans should be stuck with the consequences of their bad decisions. It is simply not a moral argument to keep people in perpetual debt penury so that they can pay back rentiers. The ancient world came up with an approach to indebtedness which has not survived to this day, however the concept of the Jubilee year has some moral merit. Debt servitude is not the answer.
I get it. Walking away with millions of dollars after you've ruined the balance sheets of your Wall Street company, and taken advantage of tax and financial legislation that you paid lobbyists for: that's capitalism, that's John Galt. Trying to borrow another $10,000 so you can prevent your kids from being thrown out of their home, that's socialism, that's moral bankruptcy.
Megan is a card carrying member of the Ayn Rand fan club. Ayn Rand of course, is the dopey author of what passes for economic treatise in many republican circles. It used to be said that Republicans were good at governance. Of course it was also said that Republicans hate sex because they weren't any good at it. At this point, they aren't good at governance either. What good are they?
@Derek,
I agree with you in theory, but real life is complicated. I am someone who is like your friend. I made a lot of mistakes earlier in my life and I will be paying for them for a long time. Last year I had a windfall of 20K which I used to pay down a larger debt. It did nothing to change my credit score or my reputation since the entity I paid the debt to doesn't know me as anything other than a metric. It was the right thing to do at the time but now that I'm unemployed and can't continue to make the 4 more 20K payments I need to clear the books I find myself back where I started. I still think it was the right thing to do based on my present philosophy, but damn I could use that 20K right now.
I'm not going to read through 167 comments to make sure this is not duplicative, but:
You're clueless Megan.
The rules governing a mortgage vary by state, but are generally not the same as those governing your credit card, or the rules it is appropriate to use for a loan from a friend.
In non-recourse (and some single-action) states, a borrower has a moral obligation to meet the terms or the loan, which means making payments or giving up the home to the lender, period.
Lenders understand this, and it they don't I have no sympathy for their stockholders.
@ MM,
I've known quite a few Republicans who were pretty good at sex.
Mighty Puck,
Lenders and borrowers have an incentive to work things out. After all, if they put you in jail, would you be able to pay them? Bankruptcy is part of the law. If it works for corporations (which are treated as persons) it should be available to individuals without stigma. When a company cannot pay its debts, it defaults. Americans should have the right to act like businesses. They shouldn't be constrained by moral imperatives any more than companies are when it comes to paying off debts that they cannot pay. A debt should not be carried around to the grave. Those who would try to enforce such a debt are parasitic vultures feeding off of dead carcasses.
Commenter Organ Meat has it right.
Do you believe your credit card company spends a lot of time thinking about the moral way to deal with you as a cardholder, Megan?
Of course not - it's strictly business for them - operating in pecuniary self-interest under their agreements as enforceable in law, with consideration to the good name of their business. Same for mortgage lenders.
Why should the borrower approach this any differently?
Also, since corporations are, in the end, just people, please tell me what corporate executives are going to give back their ill-gotten bonuses because of a moral responsibility to make the bondholders whole? Why aren't you crowing about that?
Who says that bankruptcy doesn't carry a moral stigma for businesses? Perhaps not for the corporate logo or the letterhead, but certainly for the names on the letterhead. It's about as certain an indication of professional failure as you can get. And, to the extent the people responsible are hired managers rather than owner/founders, it looks a lot like the squandering of the assets other people put into the business and the work other people did to build it up.
Believe me, I don't let the managerial class off the hook on this.
Yes, we should have both bankruptcy and foreclosure proceedings of some sort. Sometimes people get into horrible messes that aren't their fault, and we need orderly ways to wind up their affairs. We don't chain people in galleys because their family breadwinner got sick. And there really doesn't need to be a moral rule in such cases, because most of the things that get people into such messes are bad enough that people try to avoid them without any tut-tutting on society's part.
But here we have the case of people who think it's okay to walk away from a real estate loan just because the house lost value when the bubble burst. Nobody is saying they can't pay, or that their children will go hungry if they do. And it's clear that they have the legal right to walk away.
But I do not think they have the moral right. If they can pay, they have the obligation to do so. Or sell the house and recognize the loss, or rent it out, or turn it into a commune, or whatever other option gets them over this particular hump. The foreclosure option is not morally cost-free in my opinion. It should not become a social norm for whenever things don't work out exactly as planned.
And we, as a society, can do a lot to enforce this moral obligation. People still do a lot of things because of their reputations and what their actions will do to their standing in the community. If I caught any of my friends playing the jingle mail game, absent serious illness or job loss or some other dire circumstance, that person would stop being my friend very quickly.
Where does this moral obligation rank, relative to others an individual might have? Well, somewhere below feeding the kids, I'll grant that. But significantly above providing the kids with an all-expenses-paid education at a private college. Definitely above entertainment or status expenses, especially if the house itself (and perhaps the associated pool) was an entertainment or status expense in the first place.
Out of curiosity, whatever happened to PMI? I assume some of the more exotic mortgages were designed to get around this requirement. Or that fake appreciation got people past the 20% equity requirement. In which case, how were people not aware that this was insane?
What everyone else said. If you sign a no recourse loan, I don't see a moral obligation in surrendering the collateral rather than paying the balance of the loan.
If Home Depot issued you credit for the grill, and your credit agreement stated that you could satisfy the balance of the loan at any time by returning the grill, I wouldn't think it would be immoral to return the grill. How could it be?
JMann is right. Debt forgiveness is the solution to this problem. Once the debts have been written down, the economy can start to grow again. Mindlessly keeping large liabilities on the books simply because it offends the likes of Megan and some of the other dopes posting here is not moral, it is stupidity exemplified.
I would respectfully suggest that commenter M.C. is mixed up. We are not talking about the equivalent of a business bankruptcy. We are talking about the equivalent of a business not paying back a secured loan, and giving up the security in exchange.
In such a situation I think we recognize that this is a business transaction, and the borrower's primary obligation - if it is a corporation - is its fiduciary duty to stockholders. Sure, an executive's reputation may suffer if the business does poorly or defaults, but we recognize the primacy of this fiduciary duty.
Why do we recognize this, and yet assert a moral obligation for individuals, rather than recognizing an individual's fiduciary duty to his family?
Its because commenters like M.C. don't foresee a situation where they might have to default on something to keep themselves afloat. They believe that people who experience misfortune deserve all they get. We'll see how they feel when they learn the hard way that "but for the grace of God go I."
Walking away from a house worth far less than you owe is free market economics.
No, it's a breach of contract. There's no theory of economics which says anytime a contract doesn't work out as one party hoped, that party should be free to break it without consequences.
This is why we have credit scores. If you demonstrate a poor ability to pay back loans, the market cuts you off, and you no longer enjoy the benefits of being able to spend other people's money.
@organmeat,
No question that bankruptcy law is a good thing if it cleans the slate and increases the productivity of human capital. The world we live in is a much better world than the Dickensian one Megan sometimes seems to lean toward. That said, there is a "Crime and Punishment" factor to be considered. Things eat away at certain people.
They believe that people who experience misfortune deserve all they get.
People who don't pay back loans deserve to be considered poor risks for future repayment, yes. No one ever forces you to borrow money. So if you experience more misfortune than you planned for, you declare bankruptcy and the debt system washes its hands of you, usually to their great detriment.
It's one thing to have sympathy for misfortune, it's quite another to insist someone else finance your continuing misfortune ad infinitum.
Look, a hundred years ago being really poor meant a strong possibility of starving or freezing to death. Today it means you accept a low-status position in society by sleeping in a homeless shelter and eating in soup kitchens (and even that is unusual considering the high availability of food stamps). Losing status is painful but it's not the end of the world, and shouldn't be the taxpayer's problem.
I agree that it shouldn't be the taxpayer's problem. But I don't think it should be the borrower's problem either. The fact is, they give up all the principal and interest paid in, plus they have to vacate and plus, their credit score is decimated? I think that anyone who makes a business calculation taking those factors into effect is doing what all businesses do... and there shouldn't be any more stigma against that, then when businesses renegotiate or take an out clause.
Tall Dave-
I'm not a lawyer, but I believe walking away from a house is not breach of contract. Rather it is default, for which specific remedies are provided in the contract.
What is at issue is not walking away from a contract without consequences. Rather, it is defaulting and being subject to the specific default provisions of the contract.
Businesses make business decisions to default all the time. We don't typically regard this as a moral failing, but rather as a demonstration of the importance of making sure the contract contains language to protect you in the event of a default.
Payback by Margaret Atwood examines this topic really well - I think you'd enjoy it!
But there's also a question of QUANTITY: how many homeless people is too many? I don't think it would be much fun to live in an America where the ranks of the homeless continues to increase. So while I'm usually not an advocate of government handouts, I do believe the government (and all of us) have an interest in preventing some kind of third-world situation, where families live in shantytowns, while foreclosed condos sit locked and vacant across the street. I'm not saying I know how to solve this problem, but I really think we need to move beyond baby-talk lectures about morals and responsibilities, as if "we" are moral and "they" are immoral. We have a national crisis right now, at least as bad as September 11, 2001. If this continues to worsen, I'm not sure what America will look like in 2010.
This is exactly right. Anyone who thinks the shantytown rhetoric is overheated needs to check out the remarkable interview with Mayor Kevin Johnson(!) of Sacramento on Larry King Live tonight. At some point the crisis has not been avoided, discussions of morality and blame become interesting and academic, and action needs to be taken. That is the type of reasoning behind the foreclosure action that I think is the driving factor behing Megan's OUTRAGE. You can argue that the governemnt action is misguided in its means or ends, but to divert to the individual moral argument in response is to commit a non sequitur. Did these individual hard cases not add up to a collective crisis, then no one would be proposing to bail them out. The fact that these actions are being taken is not a denial of the responsibility of consumers for their decisions (though in this case that is in fact an interesting debate), even if politicians defend them as such because they result in unjust, even perverse, individual outcomes.
Megan's moral stigma in fact never does rise to much more than an interesting debate. In the real world, your credit scores determines your worthiness, it is sublimely sensitive to your behavior, and that is pretty much that. Beyond that the informal system that rewards prudent awareness of the reputation of a potential business partner's reputation is always in effect, just as it should and always be. It's not in danger just because Megan perceives some slight sympathy for underwater real estate investors (aka homeowners) in some press and political quarters.
you lost me, honey, when you said you could repair a grill with duct tape.
A house purchase is a lot different than a credit card purchase of a disposable object at home depot. Mortgage brokers, bundling, securitization, all are particulars you seem to not care about nor understand. And ARMS, and corrupt realtors, and dishonest credit agencies. Morality? what a joke!
and no one goes 'bankrupt' over a purchase of a 'grill' from home depot. Maybe in India perhaps...where grilling is like 'chilling'. And a business might be around a charcoal grill...not fixable with duct tape.
I wish Matt Yslesias would stop linking this cutie's blog. She's got good legs and a stupid mind.
TallDave writes "There's no theory of economics which says anytime a contract doesn't work out as one party hoped, that party should be free to break it without consequences."
Except for the "without consequences," the theory you are looking for is "efficient breach."
Basically, efficient breach theory argues that we *do* want to set up the consequences for breach so that the parties breach the contract when the cost of performance exceeds the consequences for breach.
The case Megan linked to involved a no recourse mortgage, which means that the consequences for walking away from the house is that the owner (1) loses the house and (2) might trash his credit rating. (I don't know the credit reporting laws regarding no recourse defaults). Assuming it's economically rational for the homeowner to suffer those consequences rather than continue to make payments on an underwater mortgage, efficient breach theory would argue that it's socially neutral or even beneficial for him to do so.
Um, why did you buy a grill in the first place? Just last summer I picked up one that had been put to the curb with a "Free" sign, obviously placed there by someone who'd just bought a newer model. I cleaned it up, got some new propane and now it's the barbeque for a 60-unit building. We live in a culture that disposes of so many perfectly good things, it doesn't make sense to go into debt for something that was overpriced to begin with. Maybe that's just me.
Thanks to J Mann for on-point response to Tall Dave.
I would go further, however. For a non-recourse mortgage, a decision to no longer make payments (and mail the keys back) is not breach of contract, rather it is default under the contract.
This is properly understood as nothing more than exercise of a course of action available to the borrower under the mortgage contract. As such, it is not fundamentally different than the decision of a lender to jack up the interest rate on an ARM, so as to maximize profit, after the teaser period expires.
It makes no more sense for Megan to criticize the former than the latter.