From economic crisis to moral crisis …

There are plenty reasons to object to the recent groundswell of support for modifying distressed mortgages (badly delinquent or already in foreclosure) by slashing rates, lengthening payback periods, and writing off part of the loan balance if a home is under water (i.e. the loan balance is greater than the market value of the home).  I find the latter provision — forgiving part of the loan because housing prices have fallen — to be particularly troublesome.

Let’s start with the moral issue:

When somebody borrows money, they accept both a legal and a moral responsibility to pay it back. 

A lender may require collateral to mitigate the riskiness of a loan, but the posting of collateral doesn’t relieve borrowers of their repayment obligations.  

If the collateral that is posted loses some or all of its market value,that’s a bad break for the lender.  But, the lender is still entitled to get its money paid back.

For example, when folks buy stocks on margin, they are borrowing money from a brokerage house and posting stocks as collateral.  If the stocks tank, the brokerage houses don’t altruistically write down the loan balance.  They sell off the borrowers’s stocks to cover the loan balance.

If somebody totals their car (i.e. value goes to zero), the bank doesn’t simply write off the auto loan.  Nope, the borrower is still on the hook — even if the insurance company stiffs them.

So, why should a home mortgage get written down when the real estate market stumbles and homes drop in market value?  It just doesn’t make sense morally.

Skipping on a debt is skipping on a debt.  Period.

* * * * *

The liberal politicos’ response is that we have a moral responsibility to keep people in their homes during rough economic times.  As I’ve said a few times already, most of these folks are occupants, not owners.  They have no equity in the homes, and in most instances — with no money down and interest only payments — they never did.  These aren’t “their” homes we’re talking about …

In subsequent posts, I’ll give the economic arguments against writing down mortgage loan balances.  I’ll even show how mortgage defaulters are likely to be rewarded with free housing if their loan balances are written down.  Talk about moral hazard …. 

* * * * *

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