mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Sunday, December 20, 2009

Pay your bills, deadbeat, or why I'd like to kick strategic defaulters in the nuts...

I was glad to see that I'm not the only person who had a negative reaction to this WSJ article about fun with strategic defaults - which pretty much boils down to profiles of people who stopped paying the mortgages on their underwater houses, and now are renters with tons of money to spend on concert tickets and new furniture.

Megan McCardle has a good article here, with the followup to the followup here.

But what's odd is that she and I seem to be a rare breed of people who think that people should actually, you know, pay their bills. Sure, on relatively conservative forums like FW Finance, people who advocate strategic default usually get replies involving the favorite FW Finance reply, "pay your bills, deadbeat!". But on Megan's blog, and places like consumerist, strategic defaulters are OK, because banks are evil.

I'm not going to debate the merits of banks or individuals. I do think that people - and businesses - who agree to pay a debt should pay it as long as they are able to. It's one thing to not pay because you really can't - that's why we have things like bankruptcy. But mortgages were designed to be a means of financing a large purchase, not as a sort of option on a house, payable only if the house goes up in value.

So right now mortgages are priced with the expectation that people will make every effort to pay them back. With the number of strategic defaulters, who seem to view them more as a sort of loan on buying a stock option, that is about to change. And that will make responsible buyers and borrowers worse off. Because now mortgages will be priced more like buying stocks on margin. Credit scores and down payments will be higher, and fewer people will be able to buy houses at all. And those who do will pay for it dearly - and those who view mortgages the way they are supposed to be viewed - as financing for a large, long-term purchase - will be paying extra for a feature they will never use - to make up for strategic defaulters.

So this is bad for first-time homebuyers. It's also bad for people who own homes, because fewer and more expensive mortgages mean lower housing prices when they go to sell.

Now, you are probably wondering where I fall into this. FWIW, I'm probably marginally upside down on Casa De Mad, my circa -1978 townhouse - not enough that it would make sense to destroy my 800+ credit score, even if I didn't have the ethical objections to strategic default. And I have enough income and savings to pay my mortgage - but I have that because I've generally lived frugally and sacrificed, and it's frustrating to read about the great lifestyles that these people are having - and that I'm going to pay for if I ever refinance or sell.


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