Wednesday, December 9, 2009

The morality of walking away

So, there's been an ongoing discussion on another blog ( on the morality of walking away from a mortgage if you're underwater. In particular if you could continue to pay, but decide its a bad economic decision. I think the whole idea of viewing a business contract from a moral point of view is silly. So in the interest of having a new post on my own blog, i'll just copy my posts from bubblemeter.

Morality does not enter into the equation. These are contractual obligations in
which both parties understand the risks. We can't apply arbitrary moral
standards to one side of a contract (the consumer) while the other side
(whatever corporate or government agency) is exempt. No one expects citibank to
consider the morality of foreclosing on a mortgage or making a loan. And to make
the game fair, the consumer has to use the same decision making standards. Its
the invisible hand of the market acting rationally. I'm surprised that a
libertarian would make this types of morality

There is also no "abdication or responsibility" here (as kevin argued). The borrower is responsible to pay his loan or to move out of the house. if the bank made a loan for more than the house was worth to a person who stops paying then they lose money. thats called risk. its why borrowers pay prime+risk premium. this is how loans and investing work. pardon me if i don't shed a tear for the poor bank who just didn't know that their stupid loans might default. perhaps when everything was going smoothly in 2007 the banks should have made the "moral" decision that their borrowers had made a bad decision in overpaying for the house and dropped the principal amount? Or the seller could have come back and said "my bad, i totally overcharged you so let me pay you 200k. that's the moral thing to do". I don't remember anyone here advocating that. But it sure would have be moral and responsible of them.

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