Economics is cool because it’s a mix of math and psychology. (I’m an applied mathematician. Straight-up “plug and play” equations get boring after awhile.)

I don’t have a mortgage (career renter) but the side of me who would have went to law school thinks this:

1. I signed a contract saying that I would receive X for making $Y payments for Z months.

2. My payment activity may be reported to the consumer reporting agencies.

3. If I fail to make those payments, certain actions may happen.

So, for those who say that “I agreed to make payments” well, yeah, I did. But they’re telling a half-truth. I agreed to make payments AND I agreed that if I failed to make those payments, then certain actions will happen. I signed the contract in its entirety, not just the part others want me to uphold. I signed an agreement that allows me to suffer the consequences for failing to perform. If I choose to suffer the consequences, then I should be allowed to not perform.

As an aside, (and perhaps relevant) supposedly there existed a day care facility who was having problems with parents picking up their children late. This was driving increased child-care costs because the staff needed to stay late. As a response, the facility came up with late fees, charging the parents a nominal amount for being late. In turn, this actually increased the number of parents who would pick their children up later, which was completed the opposite expected response. The conclusion was that once the “penalties” became part of the contract, the parents had no moral qualms by exercising that portion of the contract.

The economist in me (that’s the math/psych mix part of me) thinks that anybody who creates a contract, expecting/relying on performance, should create a situation that STRONGLY discourages non-performance. You don’t want strategic defaulters? Don’t lend in an environment that would encourage that, or change that environment.

As for those who live in non-recourse states, the appropriate response should have been to charge higher interest rates in the first place to cover that risk. Another possible business response is to simply not do business there.

I didn’t speak about morals and ethics, because, quite frankly, if Big Business doesn’t have to have them, why should consumers? (The selfish answer to that is *I* want you to perform on your contract, because if you don’t, it will make it more expensive for me in the future when I decide I can actually afford a house.)

Personally, I suppose I may be underwater, since as soon as I moved into my house I asked the county to reassess the value to lower my property taxes. So now it’s listed in the county files as being worth less than what I owe the bank. But I don’t consider that I’ve lost anything. I got the house for way less than the previous owner wanted, and I got the tax credit for buying it. And I didn’t buy it to flip it or to make money (it’s a damn money-pit), I bought it for the non-financial benefits that come with owning a home.

People who want to walk away because they’re paying more than a home is worth are in a different situation from me, they probably bought the home at the top of the market and they really are wasting a good 50-100k that they should never have agreed to pay. I guess whether to default or not depends on part on whether the house is a financial object or an emotional object to the borrowers.

I’m paid 375k for a house now worth 150k in 2006. My house will probably never be worth what I paid for it again in my lifetime. I’m not sinking 90% of my wealth over the next 40 years to pay for this place when it turned into such an unbelievably bad investment. I actually had a number for when I would default. That number was if the house went below $200,000. It was dumb of me to get into the place when I did but I thought inflation and wage gains would make the place more affordable in 3-5 years. This home was only intended to be a starter home because I live in CA and it is small. I’ve been actively asking the bank to foreclose this place for the past 6 months as currently I am 18 months in arrears. The bank won’t move on it. I’m moving out at the end of this month because I am tired of waiting.

Frankly, I am disgusted with people attitude. If you borrow money, you should pay it back. If you bought a worthless property and you overpaid, it your fault as well as the banks fault for giving you the money to actually buy it.

Now to basically say, well it is not problem, but the banks, it is not correct.

This is why we have the problem with crisis in the first place, people stopping to pay their debt on time. If one default is fine, if it is 10%, it is seriously concerning, but if it is 40% it is destroying markets and economies.
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