An interesting article opinion piece in today’s New York Times Magazine says that it’s okay for a homeowner to walk away from a mortgage if his or her home is underwater. His reasoning is that it’s okay for homeowners to walk away from their financial obligations because financial institutions routinely walk away from theirs.
Putting aside the obviously infantile excuse that it’s okay to do something because everyone else is doing it, I have some real problems with the idea that a mortgage is a disposable legal and financial obligation that ceases to exist whenever a homeowner deems it to be in their personal interest to leave it behind.
First, the homeowner and the mortgage holder are not the only two that will be affected by this behavior. There almost certainly will be significant externalities like higher mortgage rates and required larger downpayments that will apply to others who want to buy or refinance a home as lenders seek to protect themselves from this happening again. The homeowner who is walking away almost certainly won’t give a damn whether I will have to pay more, but I sure as hell do.
Second, the rationale Lowenstein uses — that financial institutions default on obligations when they no longer see the return they were expecting so homeowners should be expected to do the same — isn’t the correct analogy. The far better one is: Homeowners shouldn’t be allowed to walk away from a mortgage that they can but no longer want to afford because the mortgage holder can’t sell the home to someone else while the mortgage is in effect just because the prospective new buyer will pay more. That’s the deal between the lender and the homebuilder: We’ll buy this house for you and won’t sell it to anyone else and you’ll be responsible for all of the agreed-upon payments.
Third, while most homeowners in the U.S. hope (or used to, anyway) to get more than they paid for their home when they sell it, there never was a guarantee that would happen. History may have convinced them that the price would always go up, but there was and is always the possibility that it would go in the other direction. Get over it.
Fourth, while most homeowners in the U.S. hope (or used to, anyway) to get more than they paid for their home when they sell it, most don’t buy it as an investment; they buy it to get a place to live. There are significant tax and other advantages to buying that homeowners enjoy in addition to (hopefully) making a huge profit. If underwater homeowners are saying they really bought their homes as investments, we should rethink the mortgage deduction and seek a refund of the taxes they didn’t pay while the mortgage was in effect.
Fifth, there is an exquisite irony to what Lowenstein is saying. Underwater homeowners typically complain vociferously about the practices of financial institutions, but Lowenstein is arguing that they should be allowed to do the same things as financial institutions. Stop complaining about what they do if you want to do what they do. And if you want to do what financial institutions do, expect the same type of regulatory oversight.
My very strong preference is that any homeowner capable of paying his or her mortgage who walks away from it simply because they don’t want to pay it any longer have their credit rating lowered significantly. I don’t want them to be able to buy another home any time soon or get a loan for any other purpose without paying extra for the privilege. That will impose on them at least some of the costs others will bear for what they’re doing.
I’m also not convinced about a federal program lowering principal for all underwater homeowners. I’m not sure why the underwater homeowner who can make the required payments but doesn’t want to do so shouldn’t be forced to declare bankruptcy and in the process bear some of the costs of his or her actions. That will likely lower what the mortgage holder can get for the home along the same lines as a reduction in principal and it will impose costs on the borrower that he or she should have to consider before walking away.
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