Mike the Mad Biologist

You Can Walk Away

File this under caveat mutuor. Henry Blodget points out the obvious in his retort to those who claim people have a moral obligation to remain in mortgages that are ‘underwater’ (paying more than the house is worth)–it’s a business contract. Blodget (italics mine):

Importantly, the reason is not that “Wall Street deserves it” or “We’ve got to teach the banks a lesson” or any of the other bogus “retribution” logic being thrown around. The reason is that you and your lender engaged in an arms-length transaction in which you balanced your competing interests and spelled out your agreement and obligations in a clear contract. And unless that contract states that you have a “moral obligation to pay,” you don’t.

Specifically, when you borrowed money to buy your house, the bank or mortgage-lender evaluated the risk of the transaction and concluded that the risk of your not paying was a risk worth taking. To protect its money, the lender also required that you pledge the house as collateral, and it required you to have some equity in the house as an additional cushion. In the event that you didn’t pay, the lender retained the right to seize the house, sell it, and pay itself off before you got your equity. The lender loaned you the money because it concluded that this was a smart business decision.

You, meanwhile, also made a business decision. You decided to borrow money to buy your house even though it meant risking your equity, home, and credit rating.

And now it turns out that both of you made a bad decision.

Fortunately, you don’t have to fight about what happens next. The contract spells everything out: If you stop paying, the lender gets the house. That’s it. Unless the contract specifically differentiates between a failure to pay based on hardship (involuntary) and a failure to pay based on a collapse in the value of the house (voluntary), there’s no difference. If you had a “moral obligation to pay,” that would be spelled out in the contract.

Contrast this with loans that do carry a moral obligation:

When you borrow money from a friend at no interest, for example. THAT is a moral obligation to pay. In this case, your friend did not lend you money to make a profit. Your friend loaned you money as a favor–with no collateral or contract.

Do I even need to point out that a multi-national banking conglomerate is not your friend?

I’m reminded of something Lance Mannion said about Tiger Woods:

Marriage is not a romantic adventure. It’s an economic enterprise.

A marriage is a business deal that’s complicated by the fact that the two people who contract to it are in love with each other.

While “home” has a strong romantic pull, ultimately we should remember that the contract is a business deal. And if it’s a bad deal, you have to coldly weigh if you should walk.