The duty of all Americans to repay their mortgage debt as a moral imperative is an illusion created by lenders (and the collusive federal government) to shame homeowners into repayment. Notwithstanding this so-called moral duty, homeowners enjoy the same rights as governments and corporations to default on their debts when fundamentals tell them it is wise to do so.

It seems a business that chooses to declare bankruptcy at the opportune moment to preserve cash flow is a wisely managed entity in the eyes of financial analysts everywhere, but a homeowner who does the same is labeled a cheat. The ability to strategically default with impunity is unique to businesses since the concept of morality in finance varies depending on whether it’s businesses or individuals involved.

The double standard is nutty.

Political rhetoric aside, the decision to strategically default is not a moral decision. Every trust deed contains a contract provision requiring the lender to take the home on any default. Homeowners are not committing a crime (or even a theological no-no) by exercising their right to default, but merely making a wise financial decision in light of current economic conditions. Declaring bankruptcy is very commonly used in the business world as a sort of restart button; a chance to pare down debt before it gets out of hand. American Airlines recently declared bankruptcy, but not as a last ditch effort to salvage the company. They made a tactical decision to cut their losses, shed some debt, get competitive standing and preserve their earnings — and investors rewarded them for it.

Underwater homeowners can do the same, but most don’t because of the perceived social and seemingly moral consequences. Though businesses are commended for a strategic bankruptcy to avoid going under, homeowners who owe more than their homes are worth are warned not to employ the same wisdom for fear of public ridicule and a scarlet letter from their lender.

What’s ironic is organizations (and Banks) that criticize the strategic default have chosen to strategically shed their black-hole assets themselves.

(Excerpts taken from: first tuesday.)



3 Comments

  • Dan Roberts

    The difference is that in signing a promissory note, knowing that one intends to “strategically default,” the borrower has committed fraud. And companies declaring bk to avoid repaying debt stick the rest of us with their burdens. So it may benefit their owners, but that doesn’t negate the societal costs, not to mention the erosion of trust in our institutions.

    • I’d agree that intending to strategically default at the time or origination would be fraud. That’s not the case in about 99% of the loans that were made. As to the societal costs of a depression – excuse me, recession – created by out of ordinary and out of reality institutional lending with no governmental oversight or regulation, just ask the 10 or so million of people who are now un- or under- employed about the societal costs they are bearing. Trust in out institutions? The same institutions that yammer about “moral hazard” and then loan 700 billion to the institutions to bail them out becasue they are too big to fail? Trust? Yeah. I don’t think so. But then, that’s just my opinion. Everyone gets their own.

  • Most of the things you claim is astonishingly appropriate and it makes me ponder why I hadn’t looked at this with this light before. Your article truly did turn the light on for me as far as this particular issue goes. However at this time there is one particular position I am not necessarily too comfortable with and whilst I attempt to reconcile that with the actual core theme of the position, allow me see what the rest of the subscribers have to point out.Well done.

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