STRATEGIC DEFAULT AND HOMEOWNERSHIP

Yesterday, I listened to "Meet the Press."  The guests were Dr. Alan Greenspan and Former Treasury Secretary Henry Paulson.  The commentator asked these former government officials if they were concerned that so many homeowners are "unwater" on their home mortgages, especially when the fair market value of the home is less than 75% of the mortgage amount.  In unison the two said that most homeowners will continue to pay their mortgages out of shame or emotional attachment to their homes.  These bank representatives believed that the homeowner reluctance to default was a good thing.  They are merely interested in lender solvency and profitability. 

I, personally, was appalled.  It makes much more sense for homeowners in financial trouble to deed their homes back to their lenders than to live in unaffordable dwellings for many years.  The opportunity costs imposed by staying in unaffordable mortgages for the homeowners are just too high.   Homeowners may have to forego better jobs in other regions of the country.  They may forego adequately saving for their children's educations.  They may defer medical procedures that would prolong their lives or increase their happiness.  They may forego living comfortably and should consider renting instead.  Usually the dwelling next door has the same floor plan and may rent for half the current mortgage payment.  

All too often debtors consider how their actions may affect "society" or their credit ratings.   Instead of looking out for themselves, debtors may assume that the values espoused by elites are right for them.  They aren't.  Debtors should pause to think how lenders have affected them.  In days of yore, debtors actually had usury laws to protect them from high interest rates.   Laws clamped down on risky lending and kept capital located closer to home.   One did not need a 1-800 number to speak to his bank.  In my parents' generation (children of the Great Depression) borrowing for anything was discouraged.  They paid in cash.  Now I receive in the mail daily credit card offers.  In the aughts, Lenders somehow made us feel that older generational habits of thrift were antiquated and that we were "Americans" and did not have to delay the gratification of our desires.  The loan officers, afterall, did the numbers and said we could afford it.  It has now all come home to roost

My frustration is that the bankers and media do not acknowledge in personal terms the harm that their lending practices have caused.  Everyone wants Toyota to fix its cars.  No one disputes that a manufacturer should fix its defective accelerators or  brakes.  Shouldn't lenders do more to fix their defective loans?  How about writing off some principal?

Martin Conway


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