The morality of ditching your obligations

In a piece entitled “Walk Away From Your Mortgage” by New York Times writer Roger Lowenstein makes an interesting point about the recent boom in foreclosures. The economy has gone into recession, and many people have lost their jobs and are simply unable to pay their mortgages. Furthermore, it is estimated that over 10 million Americans currently owe more on their mortgages than their houses are worth (this represents a quarter of all mortgages), and there is a trend towards people who could pay their mortgages simply walking away. This group, whose actual size is unclear, has been vilified in the press and by politicians of all stripes. Those who simply choose to walk away from their mortgages, not because they have to but because it makes economic sense, have been labelled irresponsible and immoral.

But Lowenstein points out an interesting contradiction. Businesses walk away from similar obligations all the time. The investment firm Morgan Stanley recently decided to stop making payments on five San Francisco office buildings simply because the investment did not make sense. As Lowenstein points out, “Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with.” Another argument for holding onto your home is that foreclosures bring down the prices of homes in the area. But oil speculators drive up the price of gas for all of us, and those who sell stock, decrease the value of other people’s savings and retirement accounts. All of our economic decisions are interconnected, but not all are infused with moral obligation.

So homeowners are expected to be moral, while businesses are free to be self-interested economic entities. Not homo economicus but corpo economicus. Furthermore, Lowenstein points out that those who walk away from their mortgages are not avoiding the consequences of their decisions. The consequence of not paying is written into the mortgage—surrendering the house—and homeowners who foreclose are suffering this consequence.

Finally, Lowenstein argues that homeowners should feel free to foreclose on a house that is worth less than the mortgage. Housing prices are not likely to recover for a long time, and throughout the financial world, it appears that moral motivations, social bonds, and social consciousness have decreasing influence on our decisions.

There is a sad reality to this article. One cause of our current economic crisis is the breakdown of local banking and personal relationships between mortgage issuers and homeowners, as well as between borrowers and credit card companies. Each has acted like the self-interested homo economicus of neoclassical economics, and often the self-interested action of one was at the expense of another—a kind of social zero-sum. But Lowenstein argues that, in this economic prisoner’s dilemma, there is no reason for the homeowner to cooperate when everyone else is defecting. Sadly, he has a point.