The Monitor's View

Faced with an underwater mortgage: the moral choice to pay

An underwater mortgage -- or owing more than a house is worth -- is still a debt obligation. If too many people walk away and default, even if they can make payments, America will face a moral crisis.

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To walk, or not to walk? 

That is the question for nearly a quarter of US homeowners who can still make their mortgage payments but are “underwater,” or living in a house worth less than the amount they owe on the mortgage. 

Should such homeowners with “negative equity” simply pack up and leave, mailing the house keys to their lender in a desperate act known as “jingle mail”? 

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Or should they honor the “promise to pay” in their loan contract and keep up with monthly payments, hoping for steady growth in home prices?

Unfortunately for the economy and future home buyers, too many mortgage-holders are walking away, especially in markets where prices have dropped 30 to 50 percent, such as in Nevada, Florida, and Arizona. An estimated 1 in 10 people with underwater mortgages have made this choice, despite the stigma of being a shirker on a debt obligation.

Call it what you will – a “strategic default” or simply cutting one’s losses in a business decision – this trend to walk away is creating an erosion of trustworthiness, and not just for the financial industry. It is a creeping moral crisis that needs a solution soon. 

Yes, under certain circumstances and in those states where lenders have limited rights to go after a walk-away’s assets, a default can make sense – in an amoral calculation of personal finances. A buyer took a risk by assuming a rise in home prices and failed, similar to a failed business or a speculator in commodities.

Yet if more Americans get used to being deadbeats in a heartbeat, it will lead to higher interest rates and create other hurdles for those want to buy a residence and honor their contract. It would also create more uncertainty for still-wobbly banks and put a drag on the economic recovery, helping keep unemployment high. 

And with mortgage giants Fannie Mae and Freddie Mac now in government hands and running up the federal deficit, such defaults on mortgages that they back add to the flow of national red ink.

It is the ricochet effect of these individual decisions to voluntarily default that turns such a choice into a moral issue. 

The company FICO that tracks creditworthiness announced a recent finding that it called troubling: People with high FICO scores are more likely to default on their mortgage payments than on their credit-card payments. Such a trend upsets the method of determining who is a risky borrower.

A recent opinion survey found 80 percent of Americans say it is “morally wrong” to default on a mortgage if one can make the payments. The same survey, however, showed how easily people can slip off that moral high ground: 81 percent of mortgage holders who know someone who defaults are willing to default themselves. 

In other words, the social stigma around mortgage defaults can be steadily lifted if more people run away from a duty to pay off debts. At some point, a dangerous tipping point in defaults will be reached.

What really forces people to honor a mortgage? Is it simply the fear of default shame and lower credit scores for years? 

Or is there a deeper reason, such as personal distress over not living up to one’s own standard in keeping one’s word in a deal? Such a feeling is really an affirmation of one’s responsibility for personal integrity in business matters – a way to help others by maintaining trust in contracts, which is a source of economic well-being for all. 

It is a difficult choice for a person to keep paying a mortgage that is, say, a $300,000 loan while the market value of the house has dropped below that. It is also difficult to not follow the model of many companies in real estate that walk away from loans on properties. 

A notable recent example: The firms Tishman Speyer Properties and BlackRock Realty recently handed back control of a huge Manhattan apartment complex – more than 11,200 units – in Stuyvesant Town to creditors.

Some lenders, fortunately, are willing to “work with” a borrower to avoid a default. A few are even paying homeowners to keep up with mortgage payments. And various federal and state programs offer some assistance

But by and large, many “underwater” Americans need help to think through the difficult moral reasoning of whether to default – and to understand that society can only thrive on the integrity of each individual honoring a debt obligation. 

The “American dream” lies not in the material possession of a home but in keeping one’s commitments to others.

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