The "immoral" homedebtors and the "moral" bankers
October 11, 2010
– Comments (45)
You may often hear that walking away from a mortgage is "wrong". As for myself, I am amazed that this question is even being discussed seriously.
There are two possible cases: either it's legal, or it's not. If it's illegal, the lenders should just go to court and skip all the morality talk. If it is legal, there is nothing wrong with using the option that you are entitled to under the contract.
Imagine they applied the same kind of "logic" to the stock market. You purchase a risky stock. Because it's risky, you also buy a put. If you could not buy the put, you would be much less likely to purchase the stock in the first place. Your fears prove to be valid and the stock nosedives. But you have the option to limit your losses. At this moment your counterparty sends you an email asking you to behave "morally" and not exercise the option. True, he wrote the option, but he expected you would behave "morally" and never exercise it if the trade goes against him. Now, who is really immoral here?
My answer is, the option writer is clearly immoral. The stock trader is just facing the ordinary ethical issues common to all market participants.
The same applies to mortgages. If the buyer did not have the option to default, he would not pay as much for the house, and the bank would not earn as much profit from underwriting the loan. So the bank has received its option premium. In return, the buyer received the downside protection. Is it possible that the bank made a foolish bet? It's certainly possible. But this is called market. Nobody forced the bank to enter the contract. If the bank did not exercise due diligence, it's the bank's problem. Even if the bank was a victim of unforeseen circumstances, it must still be the bank's problem. It took a justified risk and it lost. Happens to people all the time.
This is one answer to the question. I'd call it semi-moral and semi-legal.
The second answer, the one that should satisfy moral purists, is that mortgage lenders do not deserve ethical treatment because their business model is unethical to the extreme. The bank earns its profit by offering a mortgage loan to you while at the same time offering the same type of loan to your rivals. There is an exact analogy for this behavior. When two countries go to war, there is always a war profiteer who earns a living by selling weapons to both warring parties. Each country must overpay for the weapons in order to avoid military defeat, but neither country can gain an advantage. The profit machine continues to run until both countries exhaust themselves. This is the essence of the mortgage lending business and it costs buyers tens of thousands of dollars overpaid in unwinnable bidding wars. This business is causing harm to the homebuyers, and if our government were ethical, this business would be illegal in the first place.
To say that you should treat your mortgage lender ethically is like saying that you should alert a thief when he drops his wallet even he has stolen your jewelry the day before. This turning the other cheek is laudable in a quasi-Christian sense, but I don't think it's good ethics. On the contrary, I think it is failure to differentiate between good, neutral, and harmful businesses that may actually be morally questionable.
So if you think of strategically defaulting, don't pity the lenders too much. They are the bad guys. Do what is necessary, but don't try to be nice.
On a final note, from a practical point of view, I think defaulting on a mortgage is a horrible idea in most cases and I wouldn't suggest it to anyone. But if you've done your economic analysis and it says default if profitable, there is no moral dilemma at all. Owning shares of Coca Cola (its beverage is not exactly what you call healthy food) is a much better reason for soul-searching.
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