Academic

Last night I flipped past 60 Minutes, then noticed the segment was on the subprime mortgage crisis, and flipped back again.  The part of the segment that caught my attention featured television journalist Steve Kroft questioning two California homeowners who were considering letting their house slip into foreclosure, now that the amount owed on their mortgage was more than the fair market value of the house.  Steve reacts negatively to this announcement, and calls it "cold logic.  Steve then discusses defaulting homeowners with a realtor, and states sadly:

"Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'" Kroft says. "There was a time, I think, when people felt really bad about not paying off a debt."

"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan. They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it," Moran says.

"Just a business decision," Kroft says.

"A business decision that has to be made," Moran agrees.

It seems as if we have inconsistent narratives about home mortgages and the mortgage crisis. On the one hand, mortgages are contracts -- contracts which allocate risks. At various times, either the lender will say that the mortgage is a contract, and if you do not pay, then you will lose the collateral, which happens to be your home. That was the deal. At other times, the borrower may say that the mortgage is a contract, and the penalty for not paying the mortgage payment is to grant ownership of the house to the lender. That was the deal. But the opposite narrative is that a mortgage is more than a contract. To a borrower, the mortgage is the key to home ownership, and so involves more complicated obligations to the borrower and the borrower's family. Steve Kroft also seems to be saying that the contract is not just a contract, but a moral promise that one has a duty not to break.

Which is it? In Contracts, I learned that breaching a contract is not a crime or even a moral failing. If a contract party can breach, either compensate the other contract party or pay an agreed-upon penalty, and still come out ahead, then it is more efficient for the party to breach the contract. I swear my Contracts professor said "The law loves an efficient breach." In a mortgage situation, the lender knows that relying on the homeowner to pay damages for breach will be tricky, so the lender takes a purchase money mortgage interest in the home to compensate the lender for breach. The lender gets comfortable with default risk, but accepts collateral value risk. I'm very interested in how we as a society assign moral value to various economic gains (my current work-in-progress explores windfalls), so I'm also interested that we've assigned a moral value to different contract breaches. What should be consistent, at the very least, is that the value of a mortgage has to run to both parties -- it's either a contract with agreed-upon obligations and penalties, or it's a heart-felt pledge with intrinsic moral obligations -- the borrowers and the lenders.