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Mortgages, Walking Away, and Morality

By pharrell

A growing number of Americans stuck with real estate losses, according to the Wall Street Journal, have decided to mail their keys to the lender and walk away from their homes. In several states--notably California--state law prohibits a mortgage lender from going after any assets other than the home that secures a mortgage, so other than a temporary headache and the destruction of one's credit record, a borrower stuck with house worth less than his mortgage loses nothing if he lets the property fall into foreclosure.

Bankers, naturally, are irate about this and argue that it is wrong for borrowers to walk out on their debts. But I've written before on this blog about the way in which the law and economics movement is changing the morality of America, and this seems to me that this trend is another piece of evidence for my theory. For all practical purposes--and thanks in large part to the lobbying of business interests--the legal system no longer views contracts as moral agreements; in the eyes of the law, there's nothing wrong with walking away from an agreement if it is profitable to do so, though a party that walks away may have to pay for the other party's actual losses. It should not come as a surprise that individuals have begun to partake of the same morality when it is in their interest to do so.

Aside from the moral questions, the the ability to walk away raising an interesting policy issue. I assume that the specter of homeowners mailing in keys is part of the reason that banks have plead so hard for a nationwide mortgage bailout. But insofar as banks put themselves in this mess--making loans to people they knew couldn't afford them, and knowing that they wouldn't be able to recover from other assets if a homeowner walks away--I see little reason why the American taxpayer should bail them out.

Full post as published by Harrell Blog on March 02, 2008 (boomark / email).