First, the vast vast majority of mortgages are being paid on time. This "crisis" is media created, and for ANY other class of assets, this would be simply entertaining business news. If the price of oil did something like this, well, we'd have complaining from producers, but still.
But I'm more concerned with the people who aren't paying right now. They're supposed to be a rapidly increasing number of people being foreclosed upon. "Jinglemail" is a new term, for people who mail their keys to the bank and take a hike. "Marketplace: Money" is normally a fairly interesting NPR personal finance show. Last weeks show was ONLY about the mortgage mess. Repeatedly, while interviewing people who were about to be foreclosed, or had lost their houses, asked questions like, "how can do this, this is your most important debt, you voluntarily agreed to pay, you promised to pay this money you owe them, etc."
I'm all in favor of people not committing fraud, but ALL a contract is a promise to perform the terms OR pay damages. That's IT. It' s not immoral to breach, it's not wrong to breach, it's a decision you should chose whenever it makes sense.
And consider this, mortgages are contracts of adhesion. All the terms were written by the lenders, within an environment where lender lobbyists have a strong advantage over other parties. So, fundamentally, the banks wrote the rules. If they screwed up, and created a situation where it makes more sense for their customers to walk than to pay, that was their bad. They should take their medicine, and do better next time. Can anyone honestly argue that if the positions were reversed, and the banks stood to significantly benefit from walking out on their contracts that they wouldn't? We know they would, someone would sue them for breach of fiduciary duty to their shareholders if they didn't.
In general, breach isn't wrong. It's not bad. We all stand to benefit, in the sense that the larger economy benefits from the most efficient allocation of capital, when people and institutions practice efficient breach. So, everyone out there who's thinking about walking away from your house, don't take any crap from anyone over it. Take your credit hit and don't let anyone make you feel bad about it. You're the efficient one.
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2 comments:
I can honestly say I'd never thought about it that way, but it does make sense. On the other hand, don't other customers of the bank who are fulfilling their contract going to suffer? I honestly don't know, the whole money thing is foreign to me.
Short answer, no. Each customer contracts with the bank for the best deal they can get. They'll breach if things turn better for them. People aren't going to drive modern banks into failure (since most of the risk has been securitized). But even if the bank did fail, it wouldn't hurt other debtors.
Here's how it would work; I borrow money from bank and buy my house. "Deadbeats" stop paying, bank fails. Creditors (or the gov't) take over the bank. I keep making my payments, they just go to a different address.
Plus, on a macro level, the people still making payments are better off if the economy allots its capital in the most efficient way possible.
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