Morals, Mortgages And Risky Business


Yesterday's  New York Times carried a story about morals and mortgages. The news value of the story was that plenty of folks are simply walking away from mortgages they can no longer pay. As real estate values have plummeted many home owners now found themselves "under water," paying down a debt to a bank for a home in which they have no equity. Many folks are renegotiating the terms of their debt, some lucky folks paying as little as 10 cents on the dollar for delinquent home equity loans.

Is walking away from such a mortgage or renegotiating a sweetheart deal immoral? Some folks think so.

A mortgage is a contract between borrower and lender. Money is advanced, and the borrower agrees to repay on certain terms. In the case of a home, those terms typically require payment over a lifetime of work. Thirty year mortgages are the norm.

But contracts are not moral pledges. They are not lifetime vows of fidelity to gods and goddesses. Contracts are merely promises that the law will enforce. Making them into neo-Kantian sorts of obligations divorced from any sense of utility or context makes them more rigid than they should be. I wonder, really, whether bankers have underwritten the notion that contracts are akin to moral pledges; bankers certainly do well receiving mortgage payments that make little economic sense for homeowners to pay.

The law recognizes that contracts aren't merely enforceable on the terms in which they were written. Parties have obligations to one another that transcend the written word. Equity reads into contracts such obligations as fair dealing and good faith. These are what as known as implied warranties. The law will not enforce a contract unfairly struck.

When the banking industry complains that folks walking away from mortgage commitments are behaving poorly, I wonder why there is no counterclaim that banks unwilling to voluntarily write down their debt aren't behaving in a similarly immoral fashion. It's apparent to all that the real estate bubble has burst; home values have fallen from one coast to another. One of the things that fed the ballooning of mortgage values was easy credit: bankers extended that easy credit to make money in the form of points and interest.

Why isn't there a claim that refusal to voluntarily write down mortgage debt is immoral?

Forgive the lame analogy: But isn't the moral protest of bankers about folks walking away from mortgages sort of like a drug dealers claim that the junkies just aren't buying like they used to?

I see the logic of walking away from a mortgage that never ends to pay for a house worth far less than the debt it takes to carry it. Why not just leave the keys on the doorstep and let the bank sell it to the next guy in search of a home. Let the bank take the loss upfront and fast. Why should consumers continue to underwrite banks well into the future. Who is giving consumers a break?

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