Dollars and Jens
Monday, April 19, 2010
non-recourse mortgage default
My feelings on the morality of non-recourse mortgage default have changed a bit over the past year or two, and I want to babble a bit about my current feelings.
I want to start with an affirmation of the belief that a moral code restrained only by what can be written into formal law is not going to work. If you go through law school and brainstorm for cracks in the system to figure out where you can tiptoe around the edges of laws on extortion, fraud, and harassment, you may be legally in the clear, but you're still an asshole. On the other hand, particularly where the law is clear and deliberate, it's a reasonable starting point as to the social consensus on appropriate behavior. Further, because housing is likely to be a large part of an average homeowner's net wealth — indeed, in a typical case the homeowner's net worth is less than the market value of the home — tail risk is likely to be particularly odious to the homeowner, and I can imagine that many well-informed people in good faith would be willing to buy a house if they can only lose everything they put into it, and that many well-informed banks acting in good faith would find these to be reasonable terms on which to offer a mortgage. Certainly if the contract is explicitly non-recourse, then, but even if it is only implicitly non-recourse because of the state in which the contract is written, I think it's reasonable for an underwater homeowner to exercise the implicit put option on the house. (For small lenders — say seller-financed mortgages — that are unsophisticated, and reasonably so, and likely not to have realized they were writing a put, I feel a bit differently, especially if the buyer was unaware of the option until things went south.)
I also think that if you're looking at bankruptcy and/or starving your children, and you think the bank won't bother coming after you, that it's fairly reasonable. You should start by approaching the bank about a formally-sanctioned short-sale, but banks are overwhelmed these days; if you're facing a situation in which you really can't meet all the obligations you've incurred, bankruptcy law is supposed to settle which ones take priority, but for the most part I don't think it's terrible if you make some changes in that outcome, especially in response to transaction costs. I think secured lending for cars and houses should be treated in bankruptcy the same way as other secured lending, and my opinion as to what the law should look like probably colors my opinion of the ethics of actions related to that. In these situations, though — where you're illegally breaching your contract because you expect nobody to bother dealing with you — I'm not going to morally clear you unless you're acting in good faith in various ways; don't buy a new SUV the next month, or a big-screen TV for that matter, or keep such items if you can liquidate them for a reasonable value. This is for a legitimate bankruptcy-type situation, and it becomes sketchier the less effort is put into pursuing formal channels.
The final case is that in which a borrower can reasonably keep making payments and keep food on the table, but is unwilling to downgrade (say) the quality of that food, or the amenities of the lifestyle, and decides to skip out because he expects not to be worth the trouble to pursue. I hope that person chokes to death on his steak.