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I generally agree with the sentiment that one is morally obligated to pay debts. This article makes a good argument that free markets don't work on morality, in

I generally agree with the sentiment that one is morally obligated to pay debts. This article makes a good argument that free markets don't work on morality, instead they are rooted in the assumption that everyone acts in their personal best interest. Anytime I think about the morality of abandoning an underwater debt, I remember that $billion corporations do this every single day.

deleted 17y ago
[deleted]
tc 17y ago
Free markets are also deeply rooted in strong and fair contract enforcement. That's the bounds-check on self-interest.
- steveplace 17y ago
  And the US markets have some of the best bankruptcy courts in the world, which helps.
CWuestefeld 17y ago
This article makes a good argument that free markets don't work on morality, instead they are rooted in the assumption that everyone acts in their personal best interest. I read it with just the opposite meaning. I understood it to say that the actual, observed behavior in the mortgage market is that howeowners are being moral. The Fools seem to question why people would act following their morals rather than purely financials. And this points to one of my favorite misunderstandings of economics, and one that I'm surprised an economist would fall for. Economics is NOT about just money. It's about why people make a choice for one thing, foregoing another. And it's all tied to what people value. It seems to me that this article validates that people really do value behaving morally, having a clear conscience. And I'm glad, because I don't want to live in the world where people take advantage just because they can.
- brc 17y ago
  And if you want to go studying Adam Smith for some 'invisible hand', you first need to understand the 'Theory Moral Sentiments'. You are correct in that it's what they value. This is the monetary aspect + other aspects. It's clear to me the reason that people with underwater houses don't default because of the credit history damage, social stigma and other feelings. Plus, they may consider walking away equivalent to selling at the bottom of the market. The article, overall, adds very little to the discussion because it approaches it from the wrong angle.
- billjings 17y ago
  Homeowner's opinions will likely change if they begin to perceive their lenders as taking advantage of that morality.
  - dagw 17y ago
    Exactly, I'm all for acting morally and sticking to the spirit of an agreement even if I can screw my counterpart by abusing some loophole, but only as long as I feel my counterpart will do me the same courtesy. If I feel my bank is out to screw me and won't give me a break, then I'll have much less problem screwing them right back. If on the other hand I feel that my bank has treated me fairly in the past, and given me a break when they technically didn't have to, then I'd be far more willing to do the moral thing.
- chrisgoodrich 17y ago
  That is an interesting contrasting viewpoint. You are absolutely correct that the observed behavior is to act morally (as they should). I had missed this point earlier.
- whyenot 17y ago
  There's an awful lot of experimental evidence coming from psychology that most people do "take advantage just because they can," especially if they think nobody is watching. If you could anonymously walk away from a financial obligation like a morgage, people might behave quite differently.
maweaver 17y ago
Do you have examples of big companies abandoning debts like that? The opposite actually comes to my mind: large companies being destroyed by their inability to get rid of underwater debts (putting aside big banks' recent problems, I'm thinking of Enron here)
- chrisgoodrich 17y ago
  General Motors comes to mind. Bankruptcy allows them to abandon their debt and continue to operate with only the best assets as the "New GM." Basically all the same assets, screwed the stockholders and debtors, but a new company.
- mrkurt 17y ago
  Ignoring bankruptcy for a second, big companies walk away from contracts all the time. Those contracts normally stipulate that one company will pay another company a certain amount of money over a particular time period, which is effectively debt. The difference between that and a mortgage is that the big companies are usually on a more equal negotiation footing than homeowners are with banks. So rather than signing a boilerplate agreement, they have teams of lawyers to pick things over, write outs, etc. So when they choose to "walk away", they usually have some reasonable way to do it and still comply with the contract.
toddh 17y ago
You are obligated to do what your contract says. Your contract says you can walk away and the bank gets the house. If the bank didn't like that potentiality because they were speculating on a loan, then apparently that's all of our problem.
- zmimon 17y ago
  I don't know exactly what mortgage contracts look like in the US, but the ones I have seen in my country don't say you can walk away. They say you can not walk away. The bank getting the house is just one consequence that happens if you violate the contract and do walk away.
  - DenisM 17y ago
    Most mortgages in US are non-recourse. http://en.wikipedia.org/wiki/Nonrecourse_debt http://en.wikipedia.org/wiki/Nonrecourse_debt
    - anamax 17y ago
      However, refis in CA are recourse. Before the crash, I was getting calls from lenders trying to get me to do a cash-out refi "so I'd have money to invest in the stock market". I assume that some went for that pitch.
  - kls 17y ago
    America severely limited the recourse of creditors when they abolished indentured servitude and wrote the bankruptcy laws. It was common principal that America would not be a debtors nation after that event Some of those laws where changed when, after heavy lobbying by the credit industry at the dawn of housing collapse (2005), a means test was created, to verify that a debtor could not pay back the debt. If he can, no matter what ramifications it has on their personal life, the debtor is required to submit to a 5 year restructuring program in which any disposable income is seized by the court and paid to ones creditors. An individual can no longer declare amnesty from debt no matter what personal reason for doing so, and no matter what hardship is experienced. Corporations are not subjected to the same measure to qualify for a chapter 7 bankruptcy. In saying that, in some states, bankruptcy is the only way to cleanly walk away from your home.
kyteland 17y ago
I tend to agree with the sentiment put forward by Karl Denninger at http://market-ticker.denninger.net/archives/1791-Finally-Mainstream-Press-Intentional-Defaults.html http://market-ticker.denninger.net/archives/1791-Finally-Mai... "Years ago there was stigma - a man's word was his bond. But that is gone now, and it is not you, the consumer who made it thus. It is in fact the very people who lent you that money who made it so - who proffered documents to you written in 4 point type that were impossible for anyone with less than a PhD to understand (and sometimes even then), that contained intentional tricks and less-than-honest inducements, and who themselves were in fact stuffing bogus loans into securities that they then peddled out to the masses!"

deleted 17y ago

[deleted]

tc 17y ago

Free markets are also deeply rooted in strong and fair contract enforcement. That's the bounds-check on self-interest.

steveplace 17y ago
And the US markets have some of the best bankruptcy courts in the world, which helps.

CWuestefeld 17y ago

This article makes a good argument that free markets don't work on morality, instead they are rooted in the assumption that everyone acts in their personal best interest. I read it with just the opposite meaning. I understood it to say that the actual, observed behavior in the mortgage market is that howeowners are being moral. The Fools seem to question why people would act following their morals rather than purely financials. And this points to one of my favorite misunderstandings of economics, and one that I'm surprised an economist would fall for. Economics is NOT about just money. It's about why people make a choice for one thing, foregoing another. And it's all tied to what people value. It seems to me that this article validates that people really do value behaving morally, having a clear conscience. And I'm glad, because I don't want to live in the world where people take advantage just because they can.

brc 17y ago
And if you want to go studying Adam Smith for some 'invisible hand', you first need to understand the 'Theory Moral Sentiments'. You are correct in that it's what they value. This is the monetary aspect + other aspects. It's clear to me the reason that people with underwater houses don't default because of the credit history damage, social stigma and other feelings. Plus, they may consider walking away equivalent to selling at the bottom of the market. The article, overall, adds very little to the discussion because it approaches it from the wrong angle.
billjings 17y ago
Homeowner's opinions will likely change if they begin to perceive their lenders as taking advantage of that morality.
- dagw 17y ago
  Exactly, I'm all for acting morally and sticking to the spirit of an agreement even if I can screw my counterpart by abusing some loophole, but only as long as I feel my counterpart will do me the same courtesy. If I feel my bank is out to screw me and won't give me a break, then I'll have much less problem screwing them right back. If on the other hand I feel that my bank has treated me fairly in the past, and given me a break when they technically didn't have to, then I'd be far more willing to do the moral thing.
chrisgoodrich 17y ago
That is an interesting contrasting viewpoint. You are absolutely correct that the observed behavior is to act morally (as they should). I had missed this point earlier.
whyenot 17y ago
There's an awful lot of experimental evidence coming from psychology that most people do "take advantage just because they can," especially if they think nobody is watching. If you could anonymously walk away from a financial obligation like a morgage, people might behave quite differently.

maweaver 17y ago

Do you have examples of big companies abandoning debts like that? The opposite actually comes to my mind: large companies being destroyed by their inability to get rid of underwater debts (putting aside big banks' recent problems, I'm thinking of Enron here)

chrisgoodrich 17y ago
General Motors comes to mind. Bankruptcy allows them to abandon their debt and continue to operate with only the best assets as the "New GM." Basically all the same assets, screwed the stockholders and debtors, but a new company.
mrkurt 17y ago
Ignoring bankruptcy for a second, big companies walk away from contracts all the time. Those contracts normally stipulate that one company will pay another company a certain amount of money over a particular time period, which is effectively debt. The difference between that and a mortgage is that the big companies are usually on a more equal negotiation footing than homeowners are with banks. So rather than signing a boilerplate agreement, they have teams of lawyers to pick things over, write outs, etc. So when they choose to "walk away", they usually have some reasonable way to do it and still comply with the contract.

toddh 17y ago

You are obligated to do what your contract says. Your contract says you can walk away and the bank gets the house. If the bank didn't like that potentiality because they were speculating on a loan, then apparently that's all of our problem.

zmimon 17y ago
I don't know exactly what mortgage contracts look like in the US, but the ones I have seen in my country don't say you can walk away. They say you can not walk away. The bank getting the house is just one consequence that happens if you violate the contract and do walk away.
- DenisM 17y ago
  Most mortgages in US are non-recourse. http://en.wikipedia.org/wiki/Nonrecourse_debt http://en.wikipedia.org/wiki/Nonrecourse_debt
  - anamax 17y ago
    However, refis in CA are recourse. Before the crash, I was getting calls from lenders trying to get me to do a cash-out refi "so I'd have money to invest in the stock market". I assume that some went for that pitch.
- kls 17y ago
  America severely limited the recourse of creditors when they abolished indentured servitude and wrote the bankruptcy laws. It was common principal that America would not be a debtors nation after that event Some of those laws where changed when, after heavy lobbying by the credit industry at the dawn of housing collapse (2005), a means test was created, to verify that a debtor could not pay back the debt. If he can, no matter what ramifications it has on their personal life, the debtor is required to submit to a 5 year restructuring program in which any disposable income is seized by the court and paid to ones creditors. An individual can no longer declare amnesty from debt no matter what personal reason for doing so, and no matter what hardship is experienced. Corporations are not subjected to the same measure to qualify for a chapter 7 bankruptcy. In saying that, in some states, bankruptcy is the only way to cleanly walk away from your home.

kyteland 17y ago

I tend to agree with the sentiment put forward by Karl Denninger at http://market-ticker.denninger.net/archives/1791-Finally-Mainstream-Press-Intentional-Defaults.html http://market-ticker.denninger.net/archives/1791-Finally-Mai... "Years ago there was stigma - a man's word was his bond. But that is gone now, and it is not you, the consumer who made it thus. It is in fact the very people who lent you that money who made it so - who proffered documents to you written in 4 point type that were impossible for anyone with less than a PhD to understand (and sometimes even then), that contained intentional tricks and less-than-honest inducements, and who themselves were in fact stuffing bogus loans into securities that they then peddled out to the masses!"