The ethics of walking away, cont.

By Felix Salmon
December 30, 2009
asked Megan McArdle how much of one's life’s savings should be given to the bank before they take one's house. She answers, gratifyingly, that in the particular case I was writing about, "obviously he should have walked away immediately." Good, we're in agreement on that. If you're going to lose your house, best just to lose your house, rather than to lose your house and your savings.

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Yesterday, I asked Megan McArdle how much of one’s life’s savings should be given to the bank before they take one’s house. She answers, gratifyingly, that in the particular case I was writing about, “obviously he should have walked away immediately.” Good, we’re in agreement on that. If you’re going to lose your house, best just to lose your house, rather than to lose your house and your savings.

But then, puzzlingly, Megan asks “what Felix thinks this has to do with people who decide to default on their mortgages so that they’ll have more money to spend on cruises and new furniture”.

Um, everything? If you have savings, you can spend that money on cruises or new furniture or anything else you like. If Tom Vellucci had walked away immediately, as Megan says he should have done, then he would have thousands of dollars in the bank. And good libertarian that she is, I’m sure she wouldn’t mind him then spending that money on a cruise, if that’s where he thought his money would be best spent. Once he’s saved his money, it’s up to Tom Vellucci, and no one else, where he spends it. Or is Megan saying that he should walk away from his mortgage obligations only if he doesn’t spend his savings on furniture or cruises?

Comments
16 comments so far

I am in agreement that if you are underwater and it is financially best, mail in the keys.

On the other hand, if you can afford the payments but prefer to live free for a year or two, from when you stop paying until you are sent packing, that is clearly stealing. It is also stealing to not repair things in that house that wear out or break from your use, in a house that is falling into ownership of the bank. This is not to mention all the outright destruction by folks who rip out and sell for pennies on the dollar everything from the kitchen cabinets to the flooring.

How could so much real estate capital in America have been destroyed in the last few years? Look no further than these stealing homeowners.

Posted by DanHess | Report as abusive

Like the joke … I have a friend … Actually, true. I have advised them to walk away in California, a non recourse state. However, they also have a HELOC, and have been warned that because the HELOC is recourse, the bank might go after her.

Two questions: (1) What is the likelihood the bank does indeed go after her? And (2) Will she get a 1099 from either the holder of the first or the second or both if she just mails the bank the keys? What should she do? She’s $250K underwater and just lost her job …

Thanks.

Posted by solotar | Report as abusive

If someone has to choose between keeping their savings and walking away from their house, and losing their savings and their house, then they are most likely in the position of losing their house anyway, and will probably not be spending their savings on cruises or furniture. If they are in danger of losing their house they are probably using their savings to stay alive.

Not that it matters. A deal is a deal. One of my favorite quotes is “when you owe a little money, you have a creditor. When you owe a lot, you have a partner.” Banks, for the most part, haven’t recognized that their customers are their partners. If they accepted that, they would be renegotiating a whole lot more mortgages than they are now.

Posted by OnTheTimes | Report as abusive

I must admit I have enjoyed your sparring with Megan on this issue. If it were up to me, with this post I declare you the winner.

Posted by scott1959 | Report as abusive

I thought libertarians stood for liberty and risk taking, turns out they are for puritanism and indentured servitude…

Posted by lemarin | Report as abusive

And just so long as anyone who has ever received food stamps or AFDC never, ever, ever so much as rents a Cadillac, so long as they shall live.

McMegan really is the personification of Ronald Reagan’s prejudices.

Posted by Dollared | Report as abusive

Worse. The McMegan is right-wing agitprop, pure and simple. Treat her the opposite that Brad Delong treats Paul Krugman: 1, remember that Megan McArdle is wrong; 2, if your analysis leads you to conclude that Megan McArdle is right, refer to rule #1.

See also my aging takedown at http://www.prospect.org/csnc/blogs/ezrak lein_archive?month=08&year=2007&base_nam e=dangerous_rather_than_annoying&81#comm ent-6118246

Posted by wcw | Report as abusive

As usual you’re being willfully obtuse in the extreme. Do you really not see the difference between someone with 0 income who walks away from their mortgage, and someone with amply sufficient income to make their payments who does the same? If not then you and Megan might as well stop talking about this issue because you’re not even having the same discussion.

Posted by nyetter | Report as abusive

As you’re deliberately ignoring, McArdle isn’t advocating people spending their savings to continue paying their mortgage. She’s saying if you have a significantly large discretionary portion of your income such that you can comfortably cover your mortgage payments, you should choose to do so.

The fact that people have historically made this choice in the affirmative has helped keep default rates fairly low over time. This, in turn, helps lower interest rates and increase the breadth of credit access. A change in this pattern will result in higher interest rates as money from pockets of honest people is transfered away to fund those who choose to walk away.

Posted by peterhsu | Report as abusive

Ah, we’re back on-topic. Sorry.

In an advanced capitalist economy, when the economics and the contract tell you to walk away, individuals who refuse to do so *undermine capitalism*. They break the expectation of rational economic behavior and create moral hazard for future lenders.

A standard fixed-rate mortgage in a non-recourse state contains an embedded put option. Refusing to put your property to the bank under any circumstance is like something out of a primitive gift economy, or worse, out of a new-society-in-the-shell-of-the-old Wobbly fantasy

What are you people, anarchosyndicalist fantasists?

Pathetic. Run the numbers and walk away if it makes sense.

Posted by wcw | Report as abusive

I second wcw’s analysis. If people continue paying their mortgages when it doesn’t make financial sense, it creates exactly the kind of conditions that lead to reckless lending and inflated real estate prices. The put option in a mortgage (or in bankruptcy for that matter) is an essential component of a dynamic free market system.

What McArdle proposes is a kind of debtor’s prison-lite, ankle bracelet capitalism. And even that would probably make things worst as debtors would try all means to flee their debts, to the detriment of communities. Case in point: Dubai, which probably compounded its problems and drained its human resources with this sort of policy.

Posted by lemarin | Report as abusive

I’ll second Ezra Klein on this “debate”:

“To pay attention to a McArdle is to be, in your small way, responsible for her writing. Her every idiotic, capital-fellating note comes from your trumpet, bucko.”

http://www.prospect.org/csnc/blogs/ezrak lein_archive?month=08&year=2007&base_nam e=dangerous_rather_than_annoying&81#comm ent-6118246

Posted by maynardGkeynes | Report as abusive

Correction to above comment: The quote is not Ezra Klein’s. It is from wcw’s comment on Klein’s article. My apologies. (I could find no editing function once my comment was posted.)

Posted by maynardGkeynes | Report as abusive

Dan Hess wrote: “It is also stealing to not repair things in that house that wear out or break from your use, in a house that is falling into ownership of the bank.”

This reminds me of the common house rule in Monopoly. The rules say that when you can’t pay a rent, you go bankrupt and have to turn over all your money and property to the player you owe. Although not in the rules, it is a common house rule that you may NOT sell everything to another player for a dollar; you either have to pay the full rent or turn over the properties as you held them when you landed on Boardwalk.

There’s a real-life parallel. Many companies in trouble have taken to issuing super-senior debt, whereby the new lenders get jumped to the front of the queue in any bankruptcy proceedings, ahead of the existing debt-holders, and thereby greatly degrading the value of those notes. As with a certain large bank’s recent decision to use “jingle-mail” with some mortgaged properties in San Francisco, this makes harder to argue that individuals have ethical obligations to preserve the value of the existing mortgage.

Posted by KenInIL | Report as abusive

Recently according to WSJ, 3.6% of prime borrowers are delinquent, which means 96.4% are keeping up! Even if fully half of these delinquencies are purposeful (unlikely!), this is less than 2% of prime mortgages. The walk-away threat is pure fiction, among prime borrowers anyway.

http://online.wsj.com/article/SB12614082 9771600239.html

Posted by DanHess | Report as abusive

Well said wcw. The ability to walk away from a mortgage afforded to homeowners by state creditor and federal bankruptcy laws is just one of the risks that mortgage lenders failed to recognize when issuing such poor loans.

Personally, I know one thing: if I had a $500,000 mortgage on a house worth $250,000, I would walk away so quick my neighbors would never know I declared bankruptcy in the first place (thereby preventing their decision to declare bankruptcy themselves because someone else did it). It’s really a rather easy decision: let’s see here, college fund for my children or Citigroup? Tough decision. While I would like nothing more than to contribute to the Citigroup bankers’ bonuses, I am pretty sure one thing I would not even consider would be how my declaring bankruptcy might induce others considering bankruptcy to follow in my footsteps. In fact, such a decision could not get much easier for me, and in fact I would be proud of my decision to do what is financially in my best interest. I might even spend a couple thousand of the quarter of a million dollars I just saved my family on a nice little cruise.

Infusing moral arguments when it comes to the world of one’s financial is misplaced. Infusing ethical arguments into the world of finance is simply not appropriate. With every financial transaction, it’s a zero sum game: someone wins and someone loses. Is it morally wrong to sell a stock you believe to be overvalued because the buyer may lose money on the trade? The problem is one could easily distort the nature of such a transaction and make a claim that I am taking (i.e., stealing) money from someone else, despite it being a perfectly legal transaction guided by a valid contractual arrangement.

The irony is that this homeowners walking away from their mortgages proves the futility of the the entire premise behind libertarianism. In the absence of restrictions preventing otherwise, humans will always act out of their own self-interest, often to the detriment of society as a whole, as is the case purportedly here when one declares bankruptcy to avoid paying a mortgage one can afford.

Posted by stevenstevo | Report as abusive
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