Rod Dreher

Rod Dreher


Mortaging one’s personal honor

posted by Rod Dreher

Let’s revisit this 2008 post of mine in which I discussed

the case of Raymond Zulueta, a California homeowner whose mellow was being harshed because he owed more money on his house than it was worth. So he walked away … and was surprised by how much better he felt about things. At the time, I mentioned that this was a dishonorable thing to have done, calling Zulueta a “therapeutic deadbeat.” But I also cited Patrick Deneen’s acid criticism that the Zuluetas of the world are simply following the example of society’s elite. Deneen:

As the Greeks well knew, the vital ingredient for shame – and, correspondingly, honor – to function in society was immediacy and care for the people in one’s polis, their views and opinions, the esteem they bestowed or withheld. Elites were honored in our society to the extent that they were themselves exemplars of the virtues that they both preached and expected of others in turn. The current widespread hostility to all these elites – Wall Street, lawyers, doctors, politicians – reflects the breakdown of a covenant of respect and honor. As our economy has become more abstract and distant, as our “communities” are compared to bedrooms (or perhaps, more aptly, hotel rooms), as our sense of continuity between past and future has been undermined by rampant mobility, impermanence and instability, there can be little wonder that “shamelessness” has spread like a contagion through our society. Such lack of shame and disregard of honor began at the top and now ripples downward through the feeding chain of class and status.

All this came to mind again today when I read Roger Lowenstein’s NYT Magazine essay. Excerpt:

Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?
Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

More:

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.
The other reason is that default (supposedly) debases the character of the borrower. 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 not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.

Where is this going? I mean, what happens in the long run when the moral sense leaves capitalism to this extent? And to what extent does the erosion of the moral sense governing economic relations have to do with the impersonality of economic transactions, e.g., the fact that your bank doesn’t hold on to your mortgage, but sells it? Remember that great “60 MInutes” report on the mortgage meltdown, which explained how mortgage brokers sold mortgages they knew to be toxic right up the line; the point was to make sure some other sucker was holding the bag when the debt bomb inside went off. A good friend who worked in the mortgage industry during the go-go years confirmed that that’s exactly what went on. It was nothing personal. That’s just the way everybody did business.
That being the case, why, aside from personal honor, should any homeowner who’s underwater struggle to keep paying for his home?



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meh

posted January 10, 2010 at 11:01 pm

metanous

posted January 10, 2010 at 11:01 pm


I don’t recall when personal honor ever was a part of capitalism. It used to be that personal honor helped to soften capitalism, to make it more tolerable in our society. And it was only when that worked in both directions that it was effective.
Now, when capitalism is stripped of those characteristics that mask its true nature, personal honor doesn’t stand a chance–because capitalism is used by the elites to increase their power at the expense of the majority. When I owed my mortgage to the Bailey Savings and Loan, I wasn’t using money in the bank: “The money’s not here. Your money’s in Joe’s house, that’s right next to yours.” So Joe needed to pay *me* back that money. Nowadays, when that money-grubbing buzzard Potter owns all the banks and uses them for his own best interests, why do I care if Potter gets his bonus for increasing deposits and getting rid of my toxic (unknown to me) mortgage? I have no personal relationship with him, or any of the large corporations that constrict my life–for personal honor to work, there has to be a person on both sides of the relationship.
““The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”–Lord Acton



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Scott Walker

posted January 10, 2010 at 11:02 pm


There is no reason.
Nobody is obligated to maintain a course of action that harms himself or his/her family.
It is wildly amusing to observe the Mr. Potters of the real world kicking the sh!t out of the middle class and then prattling about the sacredness of obligations.
If the game is rigged, the only smart course is to refuse to play any more.



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sigaliris

posted January 10, 2010 at 11:12 pm


in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale. Wow. This post has me kind of speechless, not because I disagree, but because I can’t believe people are only just noticing this wee, tiny little downside to unbridled capitalism. Everything gets reduced to what someone will pay for it? No–ya THINK?? Did any of these people ever read any back in high school?
This kind of capitalism feeds parasitically off the ethics taught to the lower classes. Employers who exploit workers and squeeze their pay and benefits profit from the simple human decency that makes people try to do a good job even if they’re giving more than they receive in return. Predatory lenders feed off the honest man who got into a bad loan but works his butt off to pay the debt. If we all treated our bosses the way they treat us, the country would grind to a halt.
On the one hand, you could argue that people owe it to their families to walk away from bad mortgages. The bank would screw them if it could. Its officers would lose no sleep and miss no meals over their plight. So why should debtors sacrifice their own well-being and that of their families to help the rapacious rich get richer?
On the other hand, I have a memory of an earlier day, sometime back in the 70s. Mr. Sig had bought a house in partnership with a (Catholic) friend who was a realtor. It proved impossible to make a profit by renting the house. The house had been bought on a land contract from an old lady who depended on the payments for living expenses. The time for the balloon payment came up. Mr. Sig’s friend had assured him he could come up with the money, but in the end, decided not to. He said he planned to walk away from the deal, and let the bank have the house. He didn’t feel bad about the old lady because he said she could re-sell the house–eventually.
Mr. Sig didn’t feel good about that. He called the former owner’s lawyer. The man initially jumped down his throat, prepared to go to war. Mr. Sig explained that he didn’t have all the money, but was prepared to pay a portion of it, and wanted to make an arrangement to do what was right and get the old lady as much of her money as he could. There was a long silence, and then the lawyer replied in a very different tone of voice. He said he didn’t think he’d ever heard an offer like that before. The contract was rewritten, and the former owner amicably accepted her house back, plus several thousand dollars that we could ill afford at the time. We had three little kids and very little money. But that’s the kind of guy I married, and that’s the way we did things. The money is water over the dam anyway. But we don’t have a sleazy deal on our consciences. From a financial standpoint, it was stupid. As the saying goes, “Take what you want, said God. Take it–and pay for it.”



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sigaliris

posted January 10, 2010 at 11:14 pm


Oops, sorry, that should have read, “Did any of these people ever read any Upton Sinclair back in high school?”



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Hector

posted January 10, 2010 at 11:21 pm


I’m not sure when capitalism ever did have a moral sense. Capitalism is, at bottom, about trying to profit and seek one’s self interest at the expense of others. It was thus in the time of St. Thomas More and the Lombard merchants, it was thus in the time of the Caribbean sugar plantations, it was thus in the time of the American robber barons, it was thus during the twentieth century in much of the third world (especially in Latin America). In this country, and in Europe, we decided to tame the worst excesses of capitalism with some social-democratic and Christian-democratic moderation, but then we decided to get rid of those restraints, and now we’re reaping the fallout.
On balance, I see that Sigaliris and some others have already made my point for me. :)



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mm

posted January 10, 2010 at 11:23 pm


If the homeowner is extremely underwater (“underwater” being defined as, “no reasonable chance of recovery of value within 5-10 years”) I think it’s a good idea to walk away. The bank gets the house back because it’s secured debt.
Today I heard a laywer on the radio put forth the idea that defaulting on a mortage won’t hurt the consumer’s credit rating if the consumer is and remains current on his other debts.
Walking away from unsecured debt is another moral question entirely, and is often the territory of scoundrels.



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Larry

posted January 10, 2010 at 11:38 pm


Businesses, including banks, routinely walk away from or renegotiation loans and mortgages when it is no longer in their best interests to keep on paying on the original note. For them to insist that individuals have some special duty to pay their mortgage beyond what is outlined in the mortgage itself, which includes the provision that the mortgagee may return the property to whoever holds the mortgage an so cancel the mortgage, is just gross hypocrisy.



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Fortiterinre

posted January 10, 2010 at 11:43 pm


I would love to see a grad student write a dissertation on this question using some kind of event-history analysis. I have a vague sense that in the 1950s, a corporation would be hurt financially through lost business if it did something as dishonorable as simply withholding payments for a bad investment. By the early 1970s, the recession of the day and the beginnings of globalization which regularly “downsized” workers and sent their jobs overseas changed this, and business seemed largely immune from social sanction for these kinds of write-offs. I wonder if my point estimates (the dates) are accurate or even if this is a verifiable historical occurrence–I’m quite confident of the latter but would love to test the dates.
A parallel question is the extent to which the social, cultural, and even spiritual meaning of home ownership has changed. If scarcely anyone is signing a 30 year mortgage with the sense that he/she/they will be in the house for that long (or even would WANT to be embedded in one community for that long), then financial shenanigans seem far more likely. If a home is primarily a transient investment and NOT a secure base for the future, it is likely to be treated like other transient investments.



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Philip Erwin

posted January 10, 2010 at 11:47 pm


Honor is a matter for people and not corporations. Which is essentially where our greatest flaw arises in our capitalist system where we treat corporations as people.
As John Michael Greer stated in his blog, The Archdruid Report, “Corporations, under the laws of the United States and most other nations, are legal persons; they have many, though not all, of the same rights that “natural persons” – that is, you and me – have under the law. Still, the most obvious difference between corporate persons and natural persons these days is that the corporate kind are noticeably more antisocial. They pursue their purposes – primarily, making money – with a single-mindedness and a lack of concern for consequences that, in natural persons, would be accurately labeled psychopathic; they’ve proven themselves consistently willing to lie, cheat, steal, and kill whenever the likely return on these acts outweighs the risk of punishment.”
These ‘great role models’ have taught a generation of people – and more to come – that honor is overrated and that personal self-interest is key. Again, honor and humility is found in real people – like Alan Greenspan who confessed his sins. We have become more ‘antisocial’ and willing to not mind the marks of shame from a society that no longer has any.



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the stupid Chris

posted January 11, 2010 at 12:34 am


Where is this going? …aside from personal honor, should any homeowner who’s underwater struggle to keep paying for his home?
The moral issue here is simple: either one pays one’s debt or one forfeits one’s collateral. Assuming that one is willing and able to do one or the other, one is behaving in a wholly moral manner.
The business issue here is whether, when and how to recognize loss. There is no moral code that says that borrowers must indemnify lenders from loss. Assuming that lender and borrower both entered into their agreements in good faith, acting according to the terms of the agreement is all that is morally required.
Appealing to “personal honor” is appealing to ego, and ego is a remarkably thin basis for any moral code. It would be dishonorable to refuse to honor the terms of one’s agreement, but there is nothing dishonorable about investing and losing. It is tragic, it is painful, but it is not dishonorable.
It is a sign of how we use wealth as a proxy for morality that Rod here suggests that recognizing loss in a timely manner is a sign of personal dishonor. I would say that it is personal dishonor to refuse to recognize loss, but rather throw good money after bad in hopes that one might avoid the unpleasant truth.



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Charles Cosimano

posted January 11, 2010 at 1:07 am


Shakespeare said it best. “What is honor, a word. What is a word, air. What is air, nothing.”



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John E. - Agn Stoic

posted January 11, 2010 at 6:30 am


That being the case, why, aside from personal honor, should any homeowner who’s underwater struggle to keep paying for his home?
Well, there’s always that moving is a real pain in the butt.
As for the argument that defaults depress home prices – those home prices should deflate as they were based on irrational exuberance to begin with.
As others here have said, I don’t see a moral issue here. The mortgage contract spells out the obligation each party has to each other. If the homeowner stops paying, the bank takes back the house.
The banks aren’t financing these mortgages out of altruism. They are taking an investment risk. Sometimes these things work out, sometimes they don’t.
Don Carleone said it best. “It’s nothing personal. Just business.”



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Jon

posted January 11, 2010 at 6:36 am


A note about the Morgan Stanley deal: the company negotiated the return of the real estate with its lender, who agreed to it. Had the company simply stopped paying on the mortgages this would have had disastrous results for Morgan Stanley, and for the finance sector as a whole: it would have been the Lehmann Brothers collapse all over again. So this is a rather different sitiuation, ethically and practically, from those people who simply stop paying on their mortgage unilaterally. If someone negotiates a similar return of their residential real estate in exchange for debt amnesty (or a short sale for that matter) then I would agree that they are not doing anything wrong. Also, Morgan Stanley will take a huge tax hit on this, whereas homeowners do not on “jingle mail”, courtesy of a special tax law that both Democrats and Republicans rushed through Congress and President Bush signed when the collapse began.
On the larger question of being underwater: we all end up underwater on our car loans. And on financing just about anything else other than real estate. Why does no one suggest walking away from those loans? Why is being underwater on a house such a huge horror while being so on a car is not?



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John E - Agn Stoic

posted January 11, 2010 at 7:31 am


Why is being underwater on a house such a huge horror while being so on a car is not?
Possibly because the way that home ownership has been sold as an investment has led to an expectation that the homeowner will be able to sell their property for more than they paid for it and that expectation has generated an upward pressure on housing prices as more people paid higher prices for homes based on that investment model?
We don’t have those sorts of expectations when buying a car.



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Dan

posted January 11, 2010 at 8:50 am


“And to what extent does the erosion of the moral sense governing economic relations have to do…”
Erosion huh? This sounds like a “good old days” version of our history. Was there really a time when men were men and honored their debts, when a man’s word was his bond, when a handshake was a good as a contract? I doubt it. I am sure the default rate is going up, but I am not sure that this means we are a society in decline. For God’s sake, in the name of capitalism we used to buy and sell human beings! Where was the honor in that? In a free market, honor is not what keeps it going–it’s profit and loss and we protect ourselves with contracts. There have always been scoundrels and cheaters (at every level of society) and there always will be.



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midtown

posted January 11, 2010 at 9:13 am


Somehow I see this issue completely differently than most everyone else. For a Christian, at least, Scripture says to let your yes be yes and your no be no. You shouldn’t have to swear to something because your ordinary assent will be seen as just as strong. So that’s all there is to it: if you agreed to a contract, you should do whatever is in your power to abide by it. If you absolutely cannot meet the terms after PRUDENTLY considering the contract before you get into it, then yes you should default. But it should be a very rare event. And if you aren’t having trouble making your payments, but your theoretical home value is low, then absolutely keep making the payments.
John E. says that we expect our residences to be investments. That might be the expectation, but it is a wrong expectation. A primary residence is a place to live that MIGHT increase in value but that is ancillary. If you own rental properties, then yes, those could be considerend investments (created through contracts). Stupid Chris seems to come from a similar point of view when he says it is not dishonorable to lose on an investment. That’s true but once again, the presence of a contract makes this situation differ from simply the loss of value on a stock certificate.
Capitalism only works when it is in the hands of a moral people. Suppose everyone casted off morality when it comes to money and did what was only in their economic self-interest. We see the result of that in some countries (I’m thinking particularly of eastern European nations). There is so much corruption that trust doesn’t exist, and you end up with a completely cash-based economy. It can work, but it is weak and very, very slow-growing. Think about how much trust plays in our economy. Every time you write a check or give some clerk your credit card number, you trust that no one in the chain will steal and misuse your account number. Likewise, if people routinely break commitments made in contracts, it will severely hinder the economy. We must protect trust (and hence binding commitments) as best we can if we want to preserve a decent system. That’s why I hate the idea of strategic default, particularly on primary residences. It’s senseless.



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David J. White

posted January 11, 2010 at 10:01 am


On the other hand, I have a memory of an earlier day, sometime back in the 70s. Mr. Sig had bought a house in partnership with a (Catholic) friend who was a realtor.
Gotta get that dig in at Catholics, don’t you, Sig?



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sigaliris

posted January 11, 2010 at 10:13 am


David J. White, I thought people like you might respond in that way. Keep in mind, though, that Mr. Sig and I were Catholics too, at the time. My point is not that Catholics in general are no good, but that they exhibit as wide a range of moral behavior as anyone else. Merely being a Catholic does not seem to guarantee a certain type of behavior. You can think you know someone, and you can think you know what to expect from them, based on their stated beliefs, and then find out rather suddenly that when it’s THEIR problem, they prefer the easy answer. I thought this was relevant, because Rod’s post is about the question of personal honor in a capitalist society. Do you think that Catholics have more personal honor than people in general? I used to think that, but I don’t now.



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Cannoneo

posted January 11, 2010 at 10:18 am


Midtown, first, it takes a particular kind of blinkered American to castigate the immorality of Eastern European economies at this moment in our history.
Second, the trust we have in our financial dealings has not been based on a belief in widespread personal morality. It has been based on the assumption that the system is well regulated. My sense when I send my CC# to an online store is not that “I bet it’s run by really good people, being that this is a Christian nation and all,” but that “there’s very little chance they would try anything crooked, because if they did it on any kind of scale they would get caught and it would harm their business.”
The fact that you led your comment by proclaiming your superior morality as a Christian tells us what we need to know about the role of religion as the ideological lip-gloss on predatory capitalism these last two or three decades.



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Jerry

posted January 11, 2010 at 10:30 am


Let’s be clear about what’s being argued by many above here:
The flaw in much of the thinking above is that these amoral defaults will have little effect on your credit rating. The worse for you if they don’t, for those conditions, sloppy lending based on phony or no credit analysis, were just what led to the collapse being responded to by these defaults in the first place.
But that’s not likely to happen a second time, at least outside selected investor groups specially chosen for their cupidity, certainly not on a large scale. No, for most people the consequence of mass default will be the obvious, tougher credit standards at higher interest rates. Three financial classes will emerge. Upper credit classes who can leverage other peoples money at favorable rates to build their assets. Dave Ramsey disciples who buy everything, even their houses strictly for cash. And the perpetually renting peasant class that’s the true legacy of this BS populist financial thinking.
The choice was never whether to buy from Bailey or buy from Potter. The choice is always to buy from Bailey or Potter and continue to pay it back in good times and in bad or to be doomed to rent from Potter forever.
Oh, wait, what am I thinking? If things get too bad we can just vote in a mortgage care bill too, without a public option, making buying from Potter the law of the land. Morons.



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Jerry

posted January 11, 2010 at 10:32 am


Let’s be clear about what’s being argued by many above here:
“We the little people feel absolutely entitled to assets we mortgage maintaining their value above that of what we owe on them at all times or else we become absolutely entitled to default on those contracts so that we don’t lose money by paying more for assets than they are worth in the near term.”
The flaw in much of the thinking above is that these amoral defaults will have little effect on your credit rating. The worse for you if they don’t, for those conditions, sloppy lending based on phony or no credit analysis, were just what led to the collapse being responded to by these defaults in the first place.
But that’s not likely to happen a second time, at least outside selected investor groups specially chosen for their cupidity, certainly not on a large scale. No, for most people the consequence of mass default will be the obvious, tougher credit standards at higher interest rates. Three financial classes will emerge. Upper credit classes who can leverage other peoples money at favorable rates to build their assets. Dave Ramsey disciples who buy everything, even their houses strictly for cash. And the perpetually renting peasant class that’s the true legacy of this BS populist financial thinking.
The choice was never whether to buy from Bailey or buy from Potter. The choice is always to buy from Bailey or Potter and continue to pay it back in good times and in bad or to be doomed to rent from Potter forever.
Oh, wait, what am I thinking? If things get too bad we can just vote in a mortgage care bill too, without a public option, making buying from Potter the law of the land. Morons.



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trotsky

posted January 11, 2010 at 11:23 am


If you can afford your payments and like your house, and don’t owe massively more than the home is worth, it might well make sense to stick around.
If you stretched yourself to the financial limits to get a toehold on the ladder to the American dream — desperately fearing circa 2005 that if you didn’t buy now you’d never be able get a home as long as you lived — only to discover that you were an utter dupe of the market. That you’ll spend the next decade or two stretching to your financial limits but still might not be able to sell your house to cover the debt on it when you need to move, well, why bother?
The anecdotes upthread about debts to “real people” are telling — in that 99 percent of our mortgages are not owned by little old ladies. It’s hard to understand how anyone would owe a debt of honor to a hedge fund.
And Jerry, without a debt bankers in the future will demand somewhat larger down payments and make it more difficult to get a loan — verifying incomes, for instance. That is, on balance, a good thing.



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kevin s.

posted January 11, 2010 at 12:24 pm


“That being the case, why, aside from personal honor, should any homeowner who’s underwater struggle to keep paying for his home?”
He shouldn’t. Nor should be expect someone to loan him money if he desperately needs it. I have been through foreclosure, (I was defrauded by a shady broker, and could not meet the loan terms I had not intended to sign… Long story) and I will have to spend the better part of this decade without access to credit. If this guy wants to have it both ways, then he should go pound sand.
Capitalism does require citizens to obey the law. Just because our government has opted not to make any sort of effort to prosecute fraudulent lenders doesn’t mean it wasn’t a widespread problem. Alas, our government is more interested in making examples of the Bernie Madoffs and AIGs of the world. That isn’t capitalism’s fault.
I would also note that there is substantial regulation in terms of what banks can do to retrieve their assets in a foreclosure situation. For example, banks may not, having retrieved their asset, come after an individual for the remainder of the loan after that asset has been sold. That’s one big reason why housing values have tanked, but it is also the reason why it makes sense for California homeowners to abandon their houses.



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Joel Kropf

posted January 11, 2010 at 2:16 pm


Chris:
“Assuming that lender and borrower both entered into their agreements in good faith, acting according to the terms of the agreement is all that is morally required.”
Two thoughts about your comment. First, this line of reasoning really does illustrate the cultural hegemony of liberal capitalism, no? All social relations shall be reduced to contract. At least since the nineteenth century, capitalist logic has triumphed in law. Reforms made contract the preeminent principle in the market, in property, and in labour, clearing away customary practices, legal structures, and moral conventions that inhibited the project of making wealth and the workforce calculable and mobile, the better to instrumentalize them in the pursuit of maximum production. Contract became the simple, transparent glue holding the system together, the one authoritative principle. And it’s easy enough for people inhabiting liberal capitalist economies to increasingly treat contract and exchange as the model that defines the legitimacy of freaking all social relations. Contract is morally important, and in one form or another it’s probably transhistorically intrinsic to human life, but if anything, we need to work on maintaining a broader, thicker sense of obligation, rather than thinking only in terms of legalized contract. Honour is not simply about ego; honour is relational. It is one potential component of the thicker sense of obligation we need.
Second, I think Rod’s discussion might remind us that what many ordinary people are actually agreeing to (at the level of their own subjective intention) when they borrow money is somewhat different from the actual legal terms of the loan. I’d guess that many people think of their loan as something that they’ve agreed to pay back, and that their lender is reasonably counting on them to pay back. They probably see the collateral not as a potential escape hatch for themselves, but as something that was the lender’s idea, a mechanism that would allow him to partially salvage his loss if worse came to worse. (I’m in no way suggesting that lenders are in actuality at a disadvantage; I’m merely speculating on borrowers’ subjective intent.) However much the industrial revolution may have involved a shift from the vision of a moral economy to the norms of a liberal economy, many people continue to harbour at least a few non-liberal assumptions in their day-to-day practice, maintaining fragmentary notions of a just price, a fair wage, a morally binding agreement, etc., apart from market conditions and legal contract. (For instance, I know a man who, feeling guilty after buying a used vehicle for substantially less than he thought it was worth, went back and gave the seller [a private individual] more money. This man, btw, considers himself a supporter of capitalism.)
So when Rod asks “what happens in the long run when the moral sense leaves capitalism to this extent,” I think he’s asking the question of the hour. It’s not that rarified capitalism has no moral sense—contract remains as a touchstone. But for the last couple centuries capitalist societies have enjoyed (or perhaps been cursed with, from the perspective of the champions of capitalism?) the continuing influence of non-liberal moral sensibilities within a substantial portion of the population. Is that coming to an end?



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stari_momak

posted January 11, 2010 at 3:51 pm


The development and underregulation of secondary mortgage markets was certainly a problem. So was trying to expand home ownership to big chunks of ‘minorities’ .



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alex

posted January 11, 2010 at 4:20 pm


There is contract which states that a person is obligated to make payments and if s/he does not, a bank takes the house as collateral. There is only one reason the banks are complaining: collaterals are worth less than loans. If a house is worth $100K and I am asking $300K, a bank won’t give me a loan. The problem is that the banks intentionally inflated the value of the collaterals. And if they did not do it intentionally, it means they are incompetent. In both cases they have nobody to blame but themselves.



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Alex

posted January 11, 2010 at 4:34 pm


There is no morality in business. Businesses do not use child’s labor not because they are moral, but because a law prohibits them to do that. Business is about making money. Before going to buy a car, we read how to negotiate the best price. Because if we don’t, we shall get the worst possible deal. Do I blame car dealers for it? No. They want to make money. That is the nature of the beast. Both of us are looking for our best interests. People who walk away from their houses do the same thing.



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Deggjr

posted January 11, 2010 at 9:02 pm


The late, great Tanta from Calculated Risk has a brilliant answer for your question: http://www.calculatedriskblog.com/2008/02/sauce-for-goose.html



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the stupid Chris

posted January 12, 2010 at 12:19 am


Hey Joel, great post. Some responses:
First, this line of reasoning really does illustrate the cultural hegemony of liberal capitalism, no?
Yes. Then again liberal capitalism is not the enemy, but has (properly regulated) resulted in a more fair distribution and greater creation and sharing of global wealth than any system that preceded it.
I think Rod’s discussion might remind us that what many ordinary people are actually agreeing to (at the level of their own subjective intention) when they borrow money is somewhat different from the actual legal terms of the loan….They probably see the collateral not as a potential escape hatch for themselves, but as something that was the lender’s idea, a mechanism that would allow him to partially salvage his loss if worse came to worse. (I’m in no way suggesting that lenders are in actuality at a disadvantage; I’m merely speculating on borrowers’ subjective intent.)
Herein lies the crux of the discussion. Borrowing and lending is a contract, not a covenant. A mortgage is not a marriage. We treat the former as if it were the latter at our own peril, because I assure you the partner in the contract does not view the transaction as a covenant, the mortgage-holder does not think of their commitment as equivalent to marriage.
But for the last couple centuries capitalist societies have enjoyed (or perhaps been cursed with, from the perspective of the champions of capitalism?) the continuing influence of non-liberal moral sensibilities within a substantial portion of the population. Is that coming to an end?
I hope so, though as they say in the circus: “There’s a sucker born every minute.”
Moral confusion between contract and covenant sets people up for failure, no matter which side they choose. The person who views the mortgage as a covenant is as destined to make a sucker of themselves as the one who views their marriage as a contract. Knowing the difference is critical to a mature moral sense.



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the stupid Chris

posted January 12, 2010 at 12:41 am


trotsky:
If you can afford your payments and like your house, and don’t owe massively more than the home is worth, it might well make sense to stick around.
We did this during the downturn in the early 1990s. We’re still here, and I’m pleased to say that we made the correct decision back then.
But we were lucky. Had I been in the same situation in a different market I would not hesitate to bail and take the 7-year hit on my credit rating and the loss of my down payment and investment in the property. Some nearby communities barely recovered the 1990 downturn when the 2008 downturn hit, I have a relative in one of those communities whose home is now worth less than it was in 1989. They would have been better off renting all these years.



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the stupid Chris

posted January 12, 2010 at 12:50 am


Hey Rod,
Just to put the point on my 12:19am post: In discussing matters of “personal honor” it might do well to consider the difference between a sacred oath and loan documents, and to consider the ramifications of divorce vs. the ramifications of default.
Our society punishes default far more rigorously than it punishes divorce, and that says more about what we really value than just about anything.



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Joel Kropf

posted January 12, 2010 at 11:22 am


Chris:
Okay, it’s reassuring to see that you regard marriage as a covenant rather than a contract; in your case liberal capitalism hasn’t triumphed quite so thoroughly. I agree that we want to see greater commitment to marriage (and to some other forms of social bonds) than to economic agreements. And it sounds right to deny an economic contract the status of a covenant (in general).
Still, this dichotomy between marriage/family (sacred, morally committed) and the economic sphere (utilitarian, self-interested) is another familiar feature of liberal capitalism, no? As customary social bonds were driven out of the economic realm in the nineteenth century, clearing the way for the dominance of rational calculation based only on self-interest and contractual arrangements, society increasingly exalted the nuclear family as the compensating antithesis of all that, the zone where personal, emotional, non-instrumental relations could reign, sheltered from the bare-knuckled game outside. But I’m not so optimistic as you that the two terms of the dichotomy can both survive long-term. Liberal economic logic has a way of colonizing everything. Our belief that marriage is a covenant isn’t too popular these days, as you might have noticed; liberal-capitalist principles, by contrast, have grown stronger and stronger.
I agree that, on balance, capitalism has put everybody in a better material position. Can’t say I’d really like to see periodic food shortages, reduced sanitation, and shorter life spans, so there’s a limit to the premodern criticisms that can be leveled at capitalism. But I strongly disagree with the notion that it’s desirable for increasing numbers of people to drop their moral-economy intuitions and more thoroughly embrace liberal market principles in their everyday pursuits. The persistence of such non-liberal sensibilities, in their limited and inconsistent form, will not prevent society from reaping the basic benefits of capitalism. Liberal principles are hardly in danger of rejection: there will always be plenty of people who pursue self-interest, employ the letter of the law to maximize their contractual advantages, and so forth, so if these practices are really so crucial to our prosperity as their champions contend, we have nothing to worry about. In our current climate, they need no further affirmation. What does deserve affirmation are the alternative considerations that people introduce in pursuit of other (or perhaps supplementary) values.
Take a former boss of mine, a small businessman who was amazingly flexible in granting my requests for time off, fulminating as he did so against the big employers who were so rigid. Or take my father (a wage-earner at the time, I believe), who was happy to work overtime for his boss without overtime pay, knowing that the boss was flexible in giving time off when requested. Dad also thought that, given this employer’s decision to give bonuses to his workers when the business was making big profits, they should have been willing (they weren’t) to accede later to a requested wage roll-back when the firm was losing money. The employer who hires someone because he likes him, not because he’s the most productive labour unit available; the person who buys from a particular vendor out of long-term loyalty, not because the prices are the very best to be found—these practices are precious and should be commended.



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Heritage Hills

posted January 12, 2010 at 6:53 pm


If this walking-away thing is the new norm, then we are sunk as a country. Banking can’t work with that kind of mentality.
I feel for those who find themselves in said situation of being underwater on their loans, but they agreed to pay the money back.



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the stupid Chris

posted January 13, 2010 at 8:53 am


Still, this dichotomy between marriage/family (sacred, morally committed) and the economic sphere (utilitarian, self-interested) is another familiar feature of liberal capitalism, no?
I’m not sure I see a dichotomy here, any more than I see a dichotomy between human beings and giraffes.
Human relationships are always going to be complex. For every boss like your former boss there’s a Disney or GM. For every employee who is part of the team there’s a Bartleby the Scrivener.
It seems to me that you’re reacting more to the libertarian/objectivist big lie that self-interest (enlightened or otherwise) is all. I find that to be pernicious as well, but it is not what underlies liberal capitalism or contracts. And while I can see possibilities for even better systems of distribution of wealth and organization of human economic affairs than liberal capitalism, I have yet to see one work in practice.
But getting back to the initial discussion, having signed a contract that allows for multiple mutually acceptable conclusions depending upon circumstances, it is impossible to then say that when circumstances turn out poorly one party must behave as if they turned out well so that the other party need not suffer any consequences of the failure of their joint enterprise. Both parties should share the pain, and default is one way that pain gets shared.



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DavidTC

posted January 13, 2010 at 11:54 am


A lot of people here need to think about this from the other direction: What caused the housing bubble?
Well, I don’t recall any magical period of time that we stopped building houses, so supply has gone up, so that means demand went up more, didn’t it?
But we’ve really not had that good an economy recently. Oh, sure, we were pretty good in the 90s, but it’s more recent home purchases that started failing. So, if people had less money, how was their more demand for purchasing houses?
Oh, that’s right, banks started giving loans to everyone, pushing up demand, and raising prices. Loans they knew people couldn’t pay back. Illegal loans.
I though it would nice to recap the story so far for people who haven’t been paying attention. Just in case people think we arrived at this point of ‘OMG, people are ripping off the banks by not paying their mortgage back’ entirely by accident.
At this point, we’re kinda talking about whether or not it’s honorable to slit your tires as a carjacker drives off with your car. Yeah, okay, maybe he only carjacked other people and has somehow legally acquired use of my car, but, eh, he can bite me…I’m doing as little to help him as possible, and if he feels my behavior skirts into illegality, well, he knows where the legal system is. Might not find too many sympathetic people for a jury, though.
And, hey, if we want to talk about ‘personal honor’ in society, let’s talk about it. And let’s start with companies letting go loyal employees who’ve worked for them for a decade because younger workers are cheaper. Or (illegally) giving people loans they know said people will end up having to forfeit. Oh, wait, do we expect corporations to have ‘personal honor’, or is it just actual people who have to have ‘personal honor’ to said corporations?
‘Honor’ is important in society. I try to be fair and just in all my dealings…when I’m dealing with people who have been fair and just to me and others. This pretty much automatically excludes all corporations, which I feel free to weasel as much money out of as I can legally get.
Which is sad, because I’m sure there are plenty of honorable ones out there…but, because dishonorable corporations own the media, I have serious trouble actually learning which ones are honorable or not.



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Stevereno

posted January 14, 2010 at 12:16 am


Generally, I agree with Rod’s point here. I am going to make a few points that may seem counter to what is saying but I will close with a point of agreement.
First the counter points, a mortgage is a contract with specific provisions for default and non-payment. At its essence, it could not be more simple: If you don’t pay, you lose the house. Also, there are consequences to the person who walks away beyond the letter of the contract. In other words, the person walking away is dealing with some consequences. Also, weren’t many of these structures suspect from a debt service standpoint any way and weren’t the banks in the superior position as far as setting terms? Interest only loans, negative amorts, zero down or very little down. The banks thought the prices of homes would always go up and made deals that they thought would be beneficial for themselves.
What if the banks had demanded some skin in the game from home buyers? The person who put a good chunk of his or her own money down on a house is a lot less likely to walk than the person who puts no money down even if his or her equity has been completely eliminated by the market downturn. In other words, your down payment or initial equity, puts you in the first loss position ahead of the bank should the value decrease. The down payment provides a margin of safety for the bank that protects it from market swings and increases the likelihood in the event of a default that there will be sufficient proceeds from the sale of the home to pay off the mortgage. Was it prudent to make 100% financing loans and who made that decision?
All that said, Rod is right. Trust makes capitalism work and makes credit more available to everyone. The people who need credit most will be hurt the most. It is a great time to borrow for stellar credits. For everyone else, it is tough. The consequences will go far beyond just those who walk away. It is also fair to say that the overwhelming majority of people who got in over their heads did so in good faith and with the intention of paying off their mortgages. I think we should be very charitable and merciful to folks who are in a desperate situations because of their home purchases. We should be very careful about casting stones at people who are forced to leave their homes due to circumstances and bad decisions. We’ve all made bad decisions and for the most part these people are paying the price for their mistakes.



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midtown

posted January 14, 2010 at 9:49 am


Remember, we’re not talking about people who are in over their heads and can’t make their mortgage payments. We’re talking about “strategic defaultists” — people who have no problem making their payments but simply don’t.



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