This article discusses the purported moral implications of a homeowner’s decision to strategically default and why no such implications exist for a strategically defaulting business.
Is a strategic default un-American?
In their collective effort to encourage homeownership by any means necessary, the government and the media make no apologies for characterizing the strategically defaulting homeowner as an unpatriotic contradiction to capitalism.
As the jobless Lesser Depression continues wreaking havoc on home values and shriveling opportunities for the unemployed, speeches and press conferences by society’s figureheads continue emphasizing the importance of sending the “right message” to your family by paying back what you promised to pay.
Why aren’t those same figureheads pointing fingers at strategically defaulting businesses?
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
Political rhetoric aside, the decision to strategically default is not a moral decision. Every trust deed contains a put option, a contract provision requiring the lender to buy the home on any default. Homeowners are not committing a crime (or even a theological no-no) by exercising their put option, but merely making a wise financial decision in light of current economic conditions. [For more information regarding the put option, see the July 2011 first tuesday article, Strategic default smarts.]
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 that criticize the strategic default have chosen to strategically shed their black-hole assets themselves. The Mortgage Bankers Association (MBA), whose president has publicly argued that strategic default “sends the wrong message” to society, recently completed a deliberate shortsale of its headquarters for millions of dollars less than the remaining principal balance of the building’s mortgage – no recourse of course.
Strictly business
While the government drones on about an underwater homeowner’s moral duty to faithfully pay his mortgage through thick and thin, lenders focus only on the bottom line when making financial decisions. Lenders could approve more modifications or principal reductions for the unemployed and beleaguered in the name of morality, but they choose profit (read: sound business decisions) over social responsibility every time.
Washington and Wall Street have deliberately confused homeowners by muddling the difference between moral decisions and business decisions. Lenders have no problem forgiving the debt of big business politicians because it earns them political clout. In the long run, it is more lucrative to stay in the good graces of politicians and business executives, which makes forgiving their debt a rational decision. [For more information regarding public policy and homeownership, see the October 2010 first tuesday article, Is homeownership a luxury or a necessity? and the March 2011 first tuesday article, The home mortgage tax deduction: inducing debt and stifling mobility.]
Debt forgiveness for one homeowner, on the other hand, means debt forgiveness for all homeowners, and that is just too much lost profit. [For more information regarding principal reduction, see the January 2011 first tuesday article, The inconsistent cramdown policy.]
Many homeowners unknowingly made bad decisions when they were encouraged by everyone to borrow money under subprime lending conditions. But lenders who made loans with adjustable interest rates and no down payments must also be held responsible for their part. As long as underwater homeowners keep faithfully paying their mortgages, lenders suffer a lesser degree of consequences for their irresponsible, overzealous behavior during the Millennium Boom.
De-occupying our homes
Lenders have made it clear they won’t budge; they fully expect homeowners to pay their mortgage no matter what. Homeowners who disagree must actively decide to stop paying their mortgage and walk away from the property, a mere exercise of the put-option written into their mortgage contracts.
The Occupy Wall Street (OWS) diaspora has migrated to foreclosed homes around the country, their motive being to stop lenders from taking homes through foreclosure. But if OWS really wants to vindicate underwater homeowners, they will picket to force lenders to take back the collateral no longer worth the amount borrowed. [For more information regarding OWS, see the December 2011 first tuesday article, OWS occupies foreclosures.]
If homeowners want to salvage their finances, they will stop believing the government- and lender-endorsed rhetoric of the good American borrower and stop making personally pointless mortgage payments.
Are y’all kidding? What the heck is going on with our country when the whiners are complaining that their gamble to make money in real estate didn’t work out and they want the rest of the taxpayers to cover their mistake.
Hmm, do you also think car dealers should hold the bag when you lose 20% of a new car’s value as soon as you drive it off the lot? No, you just continue to pay for the car until it is paid off. I am sick of those that used their home as their personal ATM card and are crying about it now. Grow up, be responsible and pay your debts. By the way, I don’t recall that lenders forced anyone to buy real estate. Congress, (Barney Frank in particular) mandated easier lending standards to such a degree that they became known as “liar loans”. Government needs to quit trying to fix things by catering to special interests and instead let the market economy work. Yes, I am proud to support the tea party.
Lenders’ “Modifications” are typically extensions of loan term, adding more to the lenders coffers. Reduced monthly payments, term increased more than the original contract.
Yes, the government is the culprit–take a good look at Fannie-Mae and Freddie-Mac AND the most rectent and stone-faced lying lobbyist, Newt Gingrich. Fannie and Freddie have been corrup since the 1980’s.
Washington and Wall Street are asking for a revolution. I’ve observed the OWS movement, and agree with their mostly unfocused ideals. We Americans of all ages, income levels and classes need to come together to get rid of these non-responsive politicians, but NOT replace them with clones who will continue the U.S.’s downward spiral in wages and corporate “advantage” as an “individual.”
Corporations, via Congress, have been granted an undeserved, and unwarranted status. Corporations, with their tax advantages, as much as they complain about how highly taxed, are raping the U.S. and the rest of the world for the benefit of a few egregious stockholders and corporate executives.
Ms. Maddie.
Really? Society should follow the moral compass of big business? I think this mentality has lost touch with the bigger solution to the problem. Individuals should not follow the non moral behavior of Big Business just the opposite we should expect that Big Business follow the same moral compass that society is expected to follow As some politicians say businesses are made up of people. If everyone who knows someone with a mortgage underwater went to work each day and insisted that the company they work for or own, run its business with a moral compass along side it profit making decisions we would have a booming economy and then homeowners wouldn’t be underwater. If households and businesses made decisions based on the long term profitability rather than this quarters profitability we would again have a thriving economy with enough to go around. If we made decisions based on the good for the largest amount of people rather than decisions about what is just best for me we again would have a thriving economy. This problem is not about us against them it is that we don’t think that what we do to our fellow human beings has any effect on us and that is wrong we are all in this together. So lets encourage individuals and Big Business to do the right thing. Don’t support businesses that have taken a strategic bankruptcy that hurts our economy. When they go bankrupt they hurt businesses that supply them and this hurts the economy.
Dear Author and others.. these foreclosing entities are fraudulent in every foreclosure.. they never spent a dime on any property. They have never contacted the investors, they can’t because the paperwork makes it impossible.. an intentional move by mers and other robo signers. Only investors can approve loan mods and foreclosures. The attorney’s that represent almost all investors have never been contacted by a single servicer./bank to date.. even though multiple attempts have been made on the part of the legal team to reach out and connect banks with investors to work through this. These pretend lenders don’t own a single property or loan.. homeowners need to hire attorney’s who understand this stuff. do a full securitization search of your mortgage.. often you will find your lender has no right to your mortgage payments.. no paper trail to show they were ever assigned your loan. Its more corrupt than the public will ever know. Yes we agreed to pay on our contracts, but we did not agree for bankers to commit the largest fraud in our history and crash our economy causing our house values to crash and loss of our income and way of life. Homeowners and investors were lied to.. so do what ever you need to do with your property. Its your property not the servicer… they have no true rights to your property. I agree if everyone walked.. it would crash the banks.. that would be great.. new better banks would arise.. banks for the people.. or everyone can sue for clear title and get settlements.. keep their homes and crash the banks. the banks never did the lending on our properties.. investors did. crash all the big banks. stop paying your taxes and see how long our corrupt government keeps going with no pay.. stop feeding the machine.
This is the path to a modern day version of a rebellion. Just as the sons of liberty threw tea into the Boston Harbor, the only way to send a message to our legislators on the concept of bankruptcy cramdowns and for lenders to act responsibly is for consumers to walk from underwater homes. The recovery time is just a short 2-3 years and in all honesty, they need all consumers in order for a return of normal times. This mean spirited approach by lenders is polarizing the public and prolonging the agony of this downturn. No matter what the lenders, legislators and in some cases the real estate community say about consumers made a promise to pay in their contracts, they equally promised and agreed to the remedy… foreclose and take the property back. They are merely choosing the remedy option. As you point out in this article, the lender are hanging tough. If 20% of the underwater homeowners would walk from their homes, it would bring them to their knees. 30%… you would have a national catastrophe. I was in a mediation on an underwater homeowner yesterday and put forth the argument that the lender has already lost 200k, we were there to mitigate their loss. They hung tough, we took a cash settlement and let them foreclose. I am impressed with their brilliance.
In order to save neighborhoods from blight and deterioration Lenders need to help with a prinicipal reduction of the unpaid mortgage balance.
Lenders are not helping the matter by devalue in shorting a mortgage committment or foreclosing and re-marketing the house at a significant loss. This marketing affects the entire area.