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Posted by on Feb 4, 2010 in Guest Contributor, Politics, Society | 32 comments

The Ethics of ‘Walking Away” From Your Mortgage

shoes_walking.jpg

It should be clear to all of us by now that the single driving factor in this economic downturn was the meltdown in home values. All the talk about how the big banks screwed us over is relevant only as it relates to the massive devaluation of our largest personal asset; our homes. If home values had stayed relatively stable, or come down at a reasonable rate, the bank crisis may have been manageable. It may have been seen as a bad couple of quarters rather than the catastrophe it became.

But that didn’t happen so here we are. And where we are may very well precipitate another huge devaluation of homes which would then lead to another round of bailouts and takeovers. This is because according to most experts, there is still slack in home values that has yet to be taken in; that our homes are still overvalued despite dropping 30-35-40%.

This has created a situation that is evidently not unprecedented except in scale; people with “underwater” mortgages – where they owe more than their house is worth – simply mailing the keys to their domicile to the bank and walking away from their mortgage obligations. Many simply stop payments and dare the bank to foreclose and evict them. Others find cheaper quarters by either renting, or taking advantage of cheaper mortgages.

There were a few of these walkaways during the housing bust of the early 1990’s. But today, nearly 5 million mortgages – about 10% of all residential mortgages in the country – are underwater (defined as a mortgage where the value of the house is 75% or less than the principle). And while no one is keeping track, one outfit has estimated that a half million people took the walkaway route last year.

Financial advisors are at the point of actually urging their clients to walkaway. Sure, their credit rating will take a hit. Better that than pouring money down a black hole where you will never realize any return on your investment.

There are a couple of ethical questions associated with walkaways that need to be addressed; one is personal, the other is an apparent double standard in the application of society’s disapproval.

Case in point; a New York developer walked away from paying the loan on 11,000 apartments in Manhattan:

The rules are different, though, for the walkaway of all walkaways.

That title is reserved for what happened to one of New York’s trophy properties, the 56-building Stuyvesant Town and Peter Cooper Village complex. Spanning 80 acres on Manhattan’s east side, it’s the largest single-owned residential area in the city. Its red brick buildings, built by Metropolitan Life in the 1940s for World War II veterans, are still a haven for the city’s middle class.

Commercial real-estate firm Tishman and its partner, investment firm BlackRock, paid $5.4 billion to buy the property from MetLife in late 2006 — right at the market’s peak. They hoped to make money by converting rent-regulated apartments into luxury condos and raising rents.

Then the housing crash hit. The value now: $1.8 billion.

And you thought you overpaid for your house.

“They made assumptions that things would grow to the moon, and things certainly did not,” said Len Blum, a managing partner at investment bank Westwood Capital.

Tishman said last week that it was turning the property back over to creditors to avoid filing for bankruptcy protection. In recent weeks, Tishman failed to restructure $4.4 billion in debt, and couldn’t find another buyer, according to a statement from the company.

Will Tishman come in for less disapprobation than a homeowner who walks away from a mortgage where he is paying 40% more than the house is worth? It’s a certainty that banks are treating Tishman differently than the ordinary homeowner:

Walking away isn’t risk-free. A foreclosure stays on a consumer’s credit record for seven years and can send a credit score (based on a scale of 300 to 850) plunging by as much as 160 points, according to Fair Isaac Corp., which provides tools for analyzing credit records. A lower credit score means auto and other loans are likely to come with much higher interest rates, and credit card issuers may charge more interest or refuse to issue a card.

In addition, many states give lenders varying degrees of scope to seize bank deposits, cars or other assets of people who default on mortgages.

Even so, in neighborhoods with high concentrations of foreclosures, “it’s going to be really difficult to prevent a cascade effect” as one strategic default emboldens others to take that drastic step, says Paola Sapienza, a professor of finance at Northwestern University. A study by researchers at Northwestern and the University of Chicago found that as many as one in four defaults may be strategic.

The double standard is easy to understand, less easy to justify. The fact is, a bank is less apt to severely penalize someone who owes them billions as opposed to someone who is into them for a few hundred thousand. The “sin” may be similar, but repentance is more complicated. It’s as if a rich man and a poor man both stole a loaf of bread; the poor man was forced to knee walk up a rocky mountain and say the rosary while the rich man got away with saying one our father, one hail mary, and a glory be (old line catholics will recognize that penance immediately).

Ideally, the same sin should engender the same penance or punishment regardless of wealth or social station. But in this case, we hold people and corporations to different standards of behavior and hence, different attitudes toward walkaways.

But it is the personal ethics of abandoning a promise to repay monies loaned in good faith by a lending institution based on your past history of good credit and timely repayment that is of most relevance for us. What happens when so many walk away from their obligations not because they can’t pay but because paying what they owe is a bad personal financial decision?

We can all sympathize with the walkaway and wonder if we’d do the same in their situation. But from an ethical standpoint, this is really rotten. By walking away, these homeowners are making it more difficult for the rest of us to get a homeloan or refinance our existing home. This is an inherently selfish act in that the walkaway fails to take into account the effect on the community and society.

And then there’s the prospect if there are enough walkaways, a tipping point will be reached and all that bad paper that is still on the balance books of major banks will cause another meltdown necessitating still more bailouts and takeovers when home values go into another death spiral.

What happens if five million Americans decide to stop overpaying their mortgages and mail the keys back to the bank? There would be a sharp decline in housing values. There would be another downward leg to the financial crisis, with a big hit to the capital of banks and other institutions holding large mortgage portfolios.

I think the housing decline would be a healthy thing, as this market is still overvalued. I don’t believe we would see a deflationary spiral, a widespread collapse of debt values, and a descent into a full-fledged Great Depression II. This was the great fear when the bubble first started popping in late 2006.

But since late 2008, the Bernanke Doctrine has showed that the modern Fed has the tools to keep this from happening. Administration officials can say whatever they want, but Too-Big-To-Fail is still reality.

What of the decline in individual purchasing power, the so-called adverse wealth effect, that would come with lower housing values? It would be muted because making mortgage payments on an overvalued house diminishes purchasing power just as badly.

But the net effect of the Great Walkaway would still be a strong downdraft in the overall economy.

I don’t for a moment believe that 5 million people will strategically default on their mortgages. But who can guess where the tipping point might be? Who can be sure that 1 million or 2 million such defaults wouldn’t crash the economy again?

All because people selfishly took stock of their personal financial situation and decided it was OK to saddle the rest of us with what is, after all, their problem. I say they have no ethical right to do it and that Congress should make it easier for banks to collect from these voluntary deadbeats.

Not surprisingly, Congress will treat these people as victims and no doubt either bail them out (one estimate is it would take about $750 billion to pay off the difference between what underwater borrowers owe and what their houses are worth), or make some accommodation with credit reporting services to give these strategic deadbeats a pass. Encouraging irresponsibility has been the hallmark of the Obama administration housing policies so why should we expect anything to be different here?

For the vast majority of us who have suffered a big hit on the value of our homes but continue to remain faithful to our obligations, this whole walkaway phenomenon is a slap in the face. We are being played for suckers. And it’s depressing to think that rewards will accrue to those ethically challenged scofflaws who don’t play by the rules but come out smelling like roses anyway.

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Copyright 2010 The Moderate Voice
  • JSpencer

    But FT, what do you really think? 😉

    I agree that people need to take personal responsibility for their debts, but when those debts have been enthusiastically encouraged as part of an out of control acquisitive mindset – a mindset that has become part of the greater culture, then assigning blame becomes more complicated. Unfettered capitalism and lack of regulation have certainly contributed to the problem, but so have greedy and unrealistic homebuyers, so did a growing casual attitude toward conspicuous consumption.

    • RickMoran

      No, you don’t believe in personal responsibility if you posit that greed is not a personal failing but rather a product of outside influences. The greedy person becomes at least partially a victim of out of control capitalism, by your lights.

      • mikkel

        “The greedy person becomes at least partially a victim of out of control capitalism, by your lights.”

        Yes they do. This is why the efficient market hypothesis is completely wrong. It’s not solely that people are irrational (which they are) but also that “rational” thought processes with the wrong timescale and data lead to unsustainable outcomes. Looking at the US historical data, it was rational to conclude that housing prices would most likely not fall that much, and so it was logical to jump in on it. I told several people not to, but they said that even though they knew it couldn’t last the way it was going, even if it lost 5% and then grew at “only” 2% a year they’d still make a killing. Well those assumptions weren’t wrong if you don’t look at the underlying dynamics.

        Environment is very much a product of how people evaluate what is realistic or not. People that had studied history over hundreds of years and also globally had a different environment and understood the logical fallacies that everyone from the government to the banks down to the man on the street were pushing, in large part based on the past. What is one person’s greed is often another person’s ignorance.

        This is a separate issue of course from the people that committed fraud to get the homes, which people like William Black (the lead regulator for the S&L crisis) claim was a huge part of the problem that has been ignored because it would show how much the major players knew that things were fishy.

      • JSpencer

        Rick, you would be wrong in thinking I don’t believe in personal responsibility, as it has been a guiding principle for most of my 58 years. But surely you must realize that many of these people who made buying decisions did in part based on the advice of experts who they placed their trust in, experts who encouraged irresponsible lending. So yes, it boils down to personal responsibility, and each of us is ultimately responsible for the decisions we make, but it’s also disingenuous to suggest that banks which have been allowed free rein in lending practices, banks that exist and gorge on a culture so worshiping of acquisition and so conditioned to debt aren’t also complicit. Because of this I also believe the solutions aren’t as cut and dry as you seem to think they are. Btw, I have a home and a mortgage that I faithfully pay for each and every month, and it’s a mortgage that is well above water, however, that doesn’t mean I don’t appreciate the difficulties others are having based on choices they made when an economy was in far better shape than is now, especially when they are choices made by people who became unemployed through no fault of their own. As I said, assigning blame is a little more complicated. None of this happened in a vacuum.

  • mikkel

    “This is because according to most experts, there is still slack in home values that has yet to be taken in; that our homes are still overvalued despite dropping 30-35-40%.”

    Debt bubbles always work the same way. An asset starts out undervalued and bargain hunters jump in, it rises so more professionals jump in and start taking out loans to leverage, eventually the common man on the street jumps in highly leveraged. When you get to the point that the debt can no longer be serviced by the incomes used, then it will collapse. The more leverage (debt) the higher it’ll go and the faster it’ll fall.

    Homes are still overvalued in many places because they still are too expensive to be serviced by the incomes there.

    “We can all sympathize with the walkaway and wonder if we’d do the same in their situation. But from an ethical standpoint, this is really rotten. By walking away, these homeowners are making it more difficult for the rest of us to get a homeloan or refinance our existing home. This is an inherently selfish act in that the walkaway fails to take into account the effect on the community and society.”

    The only two ways that things will realign are either through the asset values falling or incomes increasing. There are a million reasons why incomes are very unlikely to increase, so the most likely scenario is that housing prices will fall regardless of people walking away. Why is it a detriment to stop throwing that money into an overvalued non-productive use instead of saving it and having it to use in a productive fashion? The sooner that everyone wakes up and realizes that they should stop paying for overpriced housing, the sooner it’ll fall and people will have more discretionary spending, which will create more jobs.

    “And then there’s the prospect if there are enough walkaways, a tipping point will be reached and all that bad paper that is still on the balance books of major banks will cause another meltdown necessitating still more bailouts and takeovers when home values go into another death spiral.”

    The REAL injustice thus far is that the bailouts have been to protect bondholders that should be getting the hits, not because there wasn’t enough money around. There is no reason why we have to bailout the banks completely, the government can just do what is done in 99.999% of bankruptcies…let the bondholders take their lumps, provide short term liquidity for those that are still standing and move on. They don’t do this because a) a lot of foreign and rich investors would get angry b) a lot of pensions would get angry and c) Wall Street has intellectually captured the politicians, making them think that they have to do what is best for Wall Street. So instead what they are trying to do is inflate away the debt, for the benefit of those groups and at the expense of everyone else. This is what Simon Johnson calls “The Quiet Coup” and said it happens in all oligarchies until the riots get too large.

    He and many others that foresaw all this coming agree the banks need to be broken up and the bond holders need to take most of the hit.

    “We are being played for suckers. And it’s depressing to think that rewards will accrue to those ethically challenged scofflaws who don’t play by the rules but come out smelling like roses anyway.”

    How are the “scofflaws” getting any rewards? They still lose any downpayment and monthly payments they put in. Many states are “recourse” so they can be pursued for what they owe, even after foreclosure or short sale. Their credit rating is also hurt. It’s not the people walking away that are getting rewarded, it’s the people on the other side of the trade that would have made a killing if things hadn’t gone south, and are making a killing now by the government giving them whatever they want and creating an environment where they can leverage money risk free.

    I think everyone severely underwater should walk away (assuming you want to move in the next 10-15 years) and fight against the government giving any more to the banks.

  • ProfElwood

    All because people selfishly took stock of their personal financial situation and decided it was OK to saddle the rest of us with what is, after all, their problem.

    It cuts both ways. Why didn’t the banks refuse to loan them the money when they knew the homes were over-valued? I also feel like I’m getting ripped off when my home’s equity got sucked up when the bubble (partially) burst. But the people who pushed the artificially easy credit, and the government-backed lending programs and subsides, and even the mortgage interest credit, are also part of this bubble, and those stretch back to World War II.

    So yes, those who walk away from this mess shouldn’t be rewarded. Neither should the bankers and politicians who created it.

  • mikkel

    I’d also like to point out that many of the “responsible” homeowners bought during the bubble and that even worst case scenario, housing prices will remain above where they were at the start of the bubble (non-inflation adjusted) in most areas, so the owners that didn’t buy in the bubble will still have positive value. I see it as a bit hypocritical to denounce others as irresponsible when you (not specifically you, just owners in general) too contributed to the housing bubble by participating. The justification seems to be “well I only bought what I could afford…others didn’t” which may be true but the logic is then “This is an inherently selfish act in that the walkaway fails to take into account the effect on the community and society” about walking away. Well it’s also an inherently selfish act to buy things based solely on your own situation, without taking into account that effect on community and society. I personally explained to many people (including my parents) how to look at statistics to figure out whether there was a bubble in the area and how even if they could pay their debts, how they would probably lose money because not everyone else would. None of these people listened by the way and are now uniformly complaining about how the government isn’t being successful in propping up asset prices, or how people are walking away…when it’s still overpriced.

  • FYI – I wrote about this from my City Council Member position related to a situation my city is facing:

    http://jillmillerzimon.blogspot.com/2010/01/ap-article-asks-if-tishman-speyer-can.html

    • mikkel

      I enjoyed your perspective, but I think it’s inaccurate to say that Fifth Third and Huntington didn’t get in on it:

      “Fifth Third has lost money three straight quarters and until last year was one of the 15 largest originators of Alt-A loans. Alt-A generally refers to loans made to people who didn’t document their income.

      Huntington, meanwhile, lost nearly a half-billion dollars last quarter, replaced its top executive, virtually eliminated its dividend and still has the subprime mess it inherited when it bought SkyBank in 2007.”

      They weren’t responsible for much local subprime, but Fifth Third especially went hard into out of region bubbles (primarily Florida) and got burned.

      • Thank you for the correction and more detail. I didn’t have in-depth conversations and I do think the Fifth Third person did in fact mention the FL stuff but admittedly these were conversations in social settings related to other matters – I always was initiating the conversation and they only went for as long as we weren’t occupied with the main event, whereever we were.

        Here in Cleveland and NE Ohio, compared to the myriad other banks and lending institutions that have contributed to our problems, those two I’d consider insignificant – but again, I appreciate the fuller context – thank you.

  • JSpencer

    Jill, I think you got right to the heart of the problem with this passage:

    But what I believe has caused so much of the anger and frustration related to this particular phenomenon in the current recession is that the burden of the risk seems to be borne so unevenly, and unfairly: our system rewards the businesses for risks that lead to good returns, but it shields them from the loss of bad returns (in order to encourage them to take the risk in the first place) and we – individuals who are usually least likely to be able to absorb the loss, do not get the same benefits simply because we too subscribe to capitalism.

    • Thanks – yeah. I mean, we sometimes forget, in our anger and despair, right or wrong, that we kind of made this deal to begin with. It’s part of what I don’t always get about tea partiers – what exactly is it that they expect to come from their expressions? But again – this is the difference between being in office and having to balance and prioritize, versus being able to be an advocate for one particular position. You realize what a luxury it is to argue from such a static point – but obviously I like the challenge of the solving better – or I would have never run for office. 🙂

    • ProfElwood

      Just to be clear, bailouts are not part of capitalism. Risks are supposed to be borne by those taking them. The bailouts, guarantees, and other measures that the FDIC, the Federal Reserve, and others have taken are pure corporate welfare.

      • JSpencer

        bailouts are not part of capitalism

        No but lack of regulations and oversight sure seems to be.

        • ProfElwood

          No but lack of regulations and oversight sure seems to be.

          The original regulations were supposed to be tied to the guarantees made by the FDIC, in other words, less responsibility=less freedom. What the bankers want, and many presidents offered, was more freedom without taking back that responsibility, which has never ended well.

  • Don Quijote

    If Morgan Stanley can walk away from their mortgages with no opprobrium, I don’t see why Joe Sixpack can’t…

    What is good for the goose is good for the gander…

    • dduck12

      What is good for the goose is good for the gander”

      “Right you are,” said the man, “and here they are the very beans themselves,” he went on pulling out of his pocket a number of strange- looking beans. “As you are so sharp,” says he, “I don’t mind doing a swap with you–your cow for these beans.” …… Yes, that is so, and if it doesn’t turn out to be true you can have your cow back.”……… Jack and his mother became very rich, and he married a great princess, and they lived happy ever after” But it weren’t right, it was stealing.

  • troosvelt_1858

    I will give FT credit.

    He may be utterly intolerant of any opposing views but at least he’s honest about it.

    I’d rather have someone tell me he hates me and/or my opinions to my face rather than pretend.

  • troosvelt_1858

    Since this is an area I deal with at work it is of interest to me.

    I am of two minds on the topic.

    Certainly there were plenty of liar loans and I have an issue with banks benefiting from that. So if there is evidence of a crooked loan then my comments don’t apply to those situations.

    But I have to question to some degree how ignorant some (I emphasize SOME) buyers were.

    By this I mean if you are told you can buy a 500,000 house and pay only $ 1,000 a month for 30 years, it doesn’t take a math genius to figure out things were funny (and yes I have had a client or two with loans like this). So even if the loan was crooked, if it was this blatant I’m not sure we can entirely blame the bank.

    Also even with legitimate loans many of my clients have admitted they took out loans they knew they could not afford but were counting on the housing value going up and being able to refinance. They aren’t proud of this fact but they are honest about it. So for those people there is a certain degree of when you take the risk sometimes you lose (and in many cases they are up front about that)

    So I’m not sure in these cases the bank should take all of the hurt.

    For example, if the value of the house had gone up they certainly wouldn’t expect to share that profit with the bank so why is it that the bank is expected to take the whole loss ?

    Again, where there was evidence of pure abuse by the bank that’s one thing.

    But where the lender was knowingly taking a risk, sometimes you don’t win.

    • mikkel

      “For example, if the value of the house had gone up they certainly wouldn’t expect to share that profit with the bank so why is it that the bank is expected to take the whole loss ?”

      I think the answer is simple Patrick. Our entire monetary system is designed to guarantee profits for banks if they are prudent. As Yves Smith at Naked Capitalism says, banks used to understand that they had a social role to fulfill and the guaranteed profit was the reward for that role. She points to the 80s as the decade when they started forgetting about that.

      As Jill pointed out above, individuals are forced to speculate in assets just to keep still (since you have to at least meet the rate of inflation) and have no access to a myriad of backstops that the banks do. I think it’s pretty insane that we have a nation of speculators, especially since by definition the majority of people won’t be able to earn enough to beat inflation, but we have what we have.

      As the guardians of our financial system, I have little sympathy for the banks. They have all the cards in their favor to make great sums of money for doing nearly nothing, and that wasn’t good enough for them. I don’t think that individuals should be bailed out, but losing the time and money they put in is a consequence in and off itself. The banks on the other hand failed completely in due diligence.

  • casualobserver

    Who here has ever supported TARP (or the AIG or Chrysler/GM bailouts)? The posters here who are railing against this ought to be putting their comments in letters addressed to 1600 Pennsylvania Avenue attn: SecTreas, not here.

    So, with respect for those of us who do believe the chips need to fall unfiltered on each the origination boiler rooms, the mortgagor, the mortgagee, the securitizer, the investor, don’t fill up the bandwidth here with all this railing against corporate welfare. Dial up Paulson or especially, Geithner. No capitalist here ever advocated “too big to fail” anywhere along the food chain.

    If you have a couple of bubble properties, do what I did…go out and buy a couple of distressed and hope you average out back to even in 5 years.

  • jkremmers

    I think the author is too altruistic about homeowners who walk away from their mortgages. They are worried sick over their specific problem and not for the rest of the neighborhood. They end up eating their own moral principles as well as their life’s investment and seven years of credit. My son walked away from his mortgage at a time it went underwater and the bank raised his interest rates and refused to negotiate lower monthly payments. His offer was to extend the length of the loan at a reduced mortgage payment by $400/mo. Had the bank agreed, the mortgage would still be in good standing. Instead, the bank auctioned the home and took a $350,000 loss. I’m prejudiced, but I think the bank was acting dumber than dirt. — Jer

    • shannonlee

      Agree, the banks simply don’t care. I have family in real estate and they have seen banks take large hits because of their own laziness. It is as if they know they are being bailed out and therefore are not working to fix their bottom line.

      In one particular instance…a bank had the opportunity to almost break even on a multimillion dollar property, but didn’t complete the paperwork on time (they had to sign off on a short sale I believe). The buyer got sick of waiting and pulled out of the deal. The property has been sitting empty for a year and is now in disrepair….basically unsellable. The bank is going to end up eating a couple million on the value of the property that they now own.

      Oh wait…I guess the tax payers and home owners in the area of the home are really the ones having to eat the banks loss.

  • dduck12

    They aren’t proud of this fact but they are honest about it. So for those people there is a certain degree of when you take the risk sometimes you lose (and in many cases they are up front about that)”

    Some of these are the same people who talk on cell phones (even text) while driving, don’t pay child support and steal their neighbor’s Daily Racing Form.

    Meantime the big crooks are In DC. They are going to slowly kill the Reverse Mortgage HECM program which has allowed countless seniors (62+) from defaulting on their mortgages, and incidentally allowed them to remain in their homes as long as possible. . Your thoughts Patrick.

  • adelinesdad

    The issue for me, from an ethical perspective, is simple (which might mean I’m wrong, but I don’t think it does in this case):

    A mortgage is a contract. The mortgage itself, and the laws under which it was entered into, specify what happens if the borrower can’t or won’t pay (I don’t think the document distinguishes between the two cases). In that case, the bank gets the house and tells everyone else not to lend to this person (ie. the credit score gets dinged). Both the borrower and the lender agree to that. Lenders know that if the borrower doesn’t pay, they get the house. That’s why they do an appraisal to make sure the house is worth what they are lending. It turns out the appraisers were wrong, but that’s not the borrowers’ fault. The appraiser works for the bank.

    The only ethical question that enters the equation is whether the homeowner has some obligation to the community. That’s a personal decision, but I would not expect my neighbor to sacrifice his financial future just to artificially prop up the value of my own home. It’s a little like the question of whether we should “buy american”. Someone who does that might receive some praise, but how many of us would say that the person who is just looking for the best deal is unethical for buying a foreign car?

    • Dr J

      I agree, AD, a mortgage contract differs from texting while driving or ducking child support in that both sides entered into it with a clear understanding of the terms, the rules, and the risks.

      The whole point of the hundreds of pages of paperwork involved in a mortgage or indeed most contracts is to take the transaction out of the useless realm of good-guy/bad-guy fingerpointing and into the more productive realm of defined consequences.

    • shannonlee

      I agree too. I think you line it out pretty well.

      This has been a great thread btw.

  • Jim_Satterfield

    I find Rick’s assumption that morality and ethics have any place in modern capitalism pretty amusing. He’s obviously not reading the same business news that I am. He is, in fact, doing the same thing he decries by holding individuals and wealthy corporations to different standards. Where is the outrage that the banks are refusing to renegotiate mortgages, including adjusting principal where values have dropped precipitously, in order to encourage people to have a stake in that home?

  • yetanothermoderatevoice

    Adelines Dad (and Rick and Mikkel)

    I agree that notionally there is a contract that specifies what happens in the case of defaults (and indeed credit spreads and credit rationing exist precisely because there are defaults). I also agree that a double standard is being applied. If I recall correctly, the idea that people in business (as opposed to individuals) don’t have a problem with defaulting was pointed out by Tanta (rest in peace) at CalculatedRisk at least a couple of years ago.

    However I think we should be a little leery of being too cavalier about this. It takes time and resources to enforce laws – criminal and civil – that could be invested elsewhere. A society in which people are generally honest, and generally meet their commitments is likely to be much more desirable to live in than otherwise – i.e. there is a positive externality to having an ethical citizenry. Companies and individuals enter in contracts all the time to do productive and value-creating things all the time. What kind of society would it be when your default assumption is that your contract will not be honored?

    I think this idea dates to Adam Smith …

    • mikkel

      ” A society in which people are generally honest, and generally meet their commitments is likely to be much more desirable to live in than otherwise – i.e. there is a positive externality to having an ethical citizenry”

      Well this is something that I think the “faceless corporate conglomerate” has really hurt us on. When companies are primarily local — or at least have a lot of local flexibility — then there is a two way relationship that forms where both parties try to work together for mutual maximum benefit. When the local branch is just a persona-less drone that takes its orders from above, and the corporate level certainly doesn’t care about the individual (person or often community), while often selling its exposure entirely, then that emotional connection is broken.

      As Yves Smith keeps pointing out, there are small community banks that gave out subprime loans and have made money by meeting with each applicant, developing a rapport, keeping the loans on the books and working out something that had mutual benefit when things went south. She argues that all the regulations in the world won’t be able to replace the trust you’re talking about.

      I personally feel like companies have really led the way into dehumanizing the process, and this is an unintended side effect.

  • yetanothermoderatevoice

    Mikkel: As always your comments are thoughtful and on point. I agree with the idea about dehumanization – Scott Adams probably does the best job of exposition on that point of view. I’d quibble on corporations being faceless though – that people make the decisions they make seems to be pretty pretty predictable in terms of standard notions of principal versus agent problems. I.e. these “faceless” decisions aren’t necessarily in the interests of shareholders any more than they are of other stakeholders and society at large.

    I’m a little ambivalent on “local flexibility” and “personal relationships” in business. In addition to the good things to be said for it, they can also form the basis of nepotism, corruption, inefficiency etc.

  • shortsaleartisan

    I don’t think walking away from a contractual obligation when you have the ability to meet that obligation is ethical at all. That said; there are valid reasons why you might not be able to afford the mortgage – job loss, illness, and so on. In that case, I still don’t believe it’s ethical to just walk away – however negotiating with a bank on a short sale can be “best case” out come in that situation, as long as both the bank and the homeowner really does make out better than if they went to foreclosure. To find out if that is the case though takes due diligence and plenty of legwork, plus a sprinkling of some short sale pixie dust 🙂

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