Jingle mail, Jingle mail, Jingle all the way...

One of the new phenomenas of the current housing market is "jingle mail" - people who are simply mailing back the bank the keys to their house and walking away. Others are going even further - living in their houses, without making mortgage payments, until the bank kicks them out. The Consumerist has one such story of a family waiting to get kicked out while bragging about how they are saving the money they would otherwise spend on mortgage payments and spending it on dinners out.

Judging from the number of comments, this is a subject that evokes strong feelings on both sides. Some side with the banks - these people took out a mortgage, knew the terms, and said they would pay, and now they aren't, and thus are being unethical (or to use the vernacular of some Consumerist commenters, are douches). Others argue that they are only being rational - their contracts said if they didn't pay, they would lose their houses, and they are doing exactly that. They are being rational and not making payments on a house that is worth less than they paid for it. Why should they pay the mortgage - what's wrong with walking away from a bad investment?

I can understand the logic of walking away, although I suspect they may regret it after it royally screws up their credit. But the problem is that while what they do may be the rational thing, people doing what they are doing will long-term make the housing market worse off, home ownership harder and more expensive, and people who do think it is sleazy to not pay your bills worse off.

The problem is that, until the last year or two, the mortgage market operated under a number of assumptions - the main one being that people seldom let their houses be foreclosed on. The theory was that people would let other bills go unpaid, run up their credit cards, turn off their cable, and otherwise do whatever it took to make sure that their mortgage got paid off. That is part of the reason that mortgage interest is usually really cheap - because it's low risk. The other reason, of course, is that it's secured by a house.

In the last year or so, this has changed. People are looking at the houses they've bought less as a residence, a home, something they don't want to lose, and more like a stock they bought on margin - if it goes up, great, pocket the money, but if it goes down, walk away. That risk is why it's generally expensive to buy stock on margin.

Mortgages will become the same way - they will become considerably more expensive to reflect the fact that they are riskier. Which means fewer mortgages, fewer homeowners, and lower prices for houses because they will have more sellers chasing fewer buyers.

This is what economists would call the tragedy of the commons, named after the public commons where sheep grazed in the years where it was normal to have sheep. Because it was public property, people overgrazed, which is bad - but since the benefit went to the sheep owner, but the cost was born by the community, it happened even though it made everyone worse off long-term.

The same is happening with mortgages. It's in the self-interest, at least by their calculations, to walk away from their houses. It benefits them. But long-term, this behavior will make people worse off - and it will make those who actually bought houses they can afford, and are paying their bills instead of walking away, far worse off.

One thing I would love to see happen is for states to hold people responsible for the difference between what their house sells for and what they owe on it. Some states, including California, are no-recourse, which means that you can mail your keys back and the bank can't come after you - which means people who bought houses with ARMS, negative amortization loans, or home equity loans are walking off scott-free.

Sure, banks and mortgage brokers made some stupid loans. But ultimately, banks didn't pay for those fancy buildings and those chained-down pens and those digital time-and-temperature signs by losing money on loans. They will make loans more expensive and harder to get to make up for it, and the honest consumer - the one who pays their mortgage, even though they know that at present they probably owe more than they could get for their house, are the ones who get screwed.