January 9th, 2010

moon+venus

Strategic Defaults


Thanks to netmouse for the link to a recent NYT article on the simple justification for homeowner foreclosure.

This issue is of course very timely because of the recent real estate collapse which has left huge numbers of people burdened by hopelessly undervalued mortgages. It is made much more poignant, however, by the fact that the collapse was largely triggered by the same lenders who knowingly sold those mortgages, and who not only reaped the gains of underhandedly dumping the risks off on other parties, but dodged much of the fallout entirely by successfully lobbying to stick future generations of Americans with the bill.

The article makes some very good points about the simple fact that -- just as when big companies lay off recently-hired workers -- lenders treat their own defaults as a simple business decision. On the contrary -- just as many people feel guilty for ditching out on a job after six or twelve months -- individual borrowers feel a personal responsibility to make good on their promises.

A few highlights:

"Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. ... Nobody has said Morgan Stanley is immoral ... But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry ..."

"Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). ... [and in] our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale."

"[Borrowers' strategic defaults] would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, [it] could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis."


I have many mixed reactions to the article which i'll spare you, but for me it reinforces two trends i observe:
  1. Our contemporary political-economic system has been increasingly protecting the organizations with superior resources and position, and decreasingly prioritizing the welfare of its people, who often have little recourse.

  2. Most people are inherently superior entities than the organizations that they comprise.
Some would call these observations self-evident, but we noneless allow the perpetuation of the first despite the second.