Monday, January 18, 2010

Strategic Default

Since the big boys (banks and governments) are either defaulting, or will default, on payment of impossible debts, it behooves mortgaged home "owners" to consider the same course of action. CPA Karen De Coster has been careful to qualify this advice with the need to properly understand one's mortgage contract: If the mortgagor's obligation is either to pay on schedule or relinquish the property to the lender, he does not breach contract by ceasing payments and walking away from the house.

Nevertheless, De Coster's first column on the subject brought a torrent of vituperation from people who lack basic reading comprehension skills, or who naively accept the bankers' accusations that non-elite debtors somehow commit fraud if they avail themselves of their contractual rights. She has written a second column to address her critics:

The point is made that the mortgage is a business decision and a business contract is signed. The bank agreed upon the collateral (the house) and made the risk based on its own assessment of the collateral value. The mortgage contract is honored during a strategic default when the homeowner turns over the keys and walks away. Outside of any special contract spelling out additional obligations, there is no moral obligation to stay in the contract. There is not a moral question inherent in the contract.

During the bubble, the banks helped to perpetuate the boiling cauldron with their lack of underwriting standards, fraudulent loan devices, and their failure to properly assess the environment in which they were adding billions in loans to their balance sheets. They were taking exorbitant and asinine long-term risks. These banks became inebriated on the enormous here-and-now profits so they could pay out outrageous bonuses to their reckless risk takers and debt pushers. The banking system melted down, in part, because of the problems perpetuated by the very banks that are now suffering form the foreclosure-o-rama. Bad business decisions were made all around, leading, in part, to the mass collapse of banks on Wall Street and Main Street.

Yet I received tons of hate mails from financially illiterate folks who failed to read what I wrote in my article. They read right past what I clearly stated. We can thank the public schools for turning people into collective herds of non-thinking, emotionally-driven folks who cannot get past the first image that floats into their minds. As one commenter said on my blog, you cannot present “logical arguments to a society that is emotionally-driven. The mob is emotional, not rational; a free market can absorb this, since irrational players are marginalized (they go broke), but a democracy subsidizes irrational behavior. … The Great Society was one of the more cynically successful human engineering projects in history, it changed an entire society from independent to dependent.”

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