In a recent speech, Mortgage Bankers Association (MBA) president and chief executive officer John Courson urged homeowners to make the responsible, moral decision and keep paying on their underwater mortgages. Like many interested parties (lenders) before him, he conveniently ignored the fact that banks often make similar decisions to walk away from their poor investments. For instance, the large brokerage firm Morgan Stanley recently decided to walk away from five bay area office buildings which were no longer holding their value. Nobody blinked an eye. It was just a matter of business: privatize the profit, socialize the losses. Since 1982, lenders have learned to do it so well, and it has only gotten better for them since this financial crisis hit.

Homeowners, on the other hand, are continually excoriated for failing to “live up to their promises to pay,” as if theirs was not a monetary decision but one inherently tied into their moral worth, a theological treatment of strictly legal obligations (which in California are not given recourse status when the obligations are purchase-assist home loans). Criticisms and veiled ethical threats similar to Courson’s have been shamefully made by the media, state and federal governments to homeowners in attempts to keep them in their place — paying on dead-end loans they have no legal obligation to pay. So continues the campaign to terrorize homeowners into keeping lenders solvent and suppressive government programs “effective.”

first tuesday take: The longer this down market continues, the more hollow these calls to moral order ring. Even (incorrectly) assuming that all struggling homeowners are in dire straits due to their own financial mismanagement, they were most certainly not the only party complicit in the housing bust. Lenders loaned billions of dollars using poor underwriting standards on overvalued assets, and federal regulators failed to address (except to condone by their silence) the increasingly risky behavior of these lenders and their bond-issuing Wall Street counterparts. [For more information about failed government regulation, see the April 2009 first tuesday article Lenders vs. owners in 2000-2010: the real estate interest of each]

Why then are the homeowners the only ones being strong-armed by these so-called moral pundits? It’s simple: individuals can be shamed into doing the “right” thing. Businesses and governments, on the other hand, wield too much power and wealth to be properly shamed into anything. But as the extendandpretend programs continue to falter and government subsidies expire, as both will, watch as more and more homeowners, bolstered by being better-informed, start to push past their emotional responses and play the same game as lenders by walking away. Maybe this, if nothing else, will force the lenders to own up to their part in this debacle and start making real modifications to reduce outstanding debt in alignment with the value of property, called a cramdown.

Brokers and agents need to play their part in this “rights” game to get the public better informed about California’s non-recourse rules against money judgments on purchase-assist home loans as they are the gatekeepers that negotiated on behalf of these homeowners and got them into their predicament – and profited from it. Brokers and agents would be wise to return the homeowner the favor by advising them on what their options are now in dealing with lenders. This assistance will be remembered by the homeowner when they decide to purchase again. [For more information on shame as a weapon against underwater homeowners, see the January 2010 first tuesday article “To default or not to default: that is the question.”]

Re: Walk Away From Your Mortgage! from the New York Times Magazine