Wednesday, March 11, 2009

A parable about debt

Why should someone underwater repay the loan?
Four weeks ago, I bought a grill on my credit card. It was not the best grill Home Depot had—indeed, because I am cheap, and also have never longed to rotisserie in my very own back yard, it was the cheapest grill they had in stock, except for tiny tabletop camping models.

It's a nice grill. But I've since realized that our landlords have an old, broken grill that we might have been able to repair with enough duct tape, saving me almost $200. Meanwhile, I've discovered that I can't sell the grill for a profit, because Home Depot seems to have a large number of very similar grills in stock which they are willing to offer to buyers for a mere $200. For that matter, I can't even sell it for the value of the loan with which I financed it. The equity in my grill has dropped by about 50%. Given all that, I don't see why I should be required to pay back the credit card company. After all, they knew when they loaned me the money that I might not pay it back, and I suspect they also knew that I might not like my grill as much as I expected to. Hell, the dirty bastards may well have known that I was going to end up underwater on my grill loan. I don't see why I have any obligation to repay them.

This seems to me to be approximately the logic behind the people saying that folks who took out stupid loans don't have any sort of moral obligation whatsoever to make good their debts. The loan company didn't have your best interest at heart, the logic goes, so why should you take care of them at any cost to yourself?

Well, imagine you're the one I borrowed the grill money from. I doubt almost anyone reading this would be plunged into bankruptcy by the loss of $200. So why should I pay it, when you knew just as well as I did that the grill would depreciate and I might be better off without it?
A person who doesn't pay his debts is a person without honor.


  1. is this just for people who don't qualify for a mortgage re-write because they're still current, even though they'll soon be subsidizing ~9 million other mortgages? what about the guy who can either feed his kids or payoff the grill?

    it's just a business transaction. it's not like there are no consequences. the lender's risk manager is fired, and the debtor's credit is destroyed for 7 years.

  2. Stupid, silly comparison.

    Why should any business contract be dissolved?

    I just took a paycut that was promised me. Why?

    Why should auto workers accept less?

    Why should companies go out of business and stop paying on a lease?

    The fact is that it's a business decision.

    You agreed to the loan or they'd take your house.

    Well, you stop paying and they take your house and destroy your credit.

    The contract has been followed.

    Don't destroy your family's financial future out of some silly moral obligation that apparently only applies to you, the individual homeowner, yet every CEO, business or bank is somehow exempt.

    Average Joe

  3. Average Joe, just because it is legal doesn't mean it is moral. What a sad state of affairs when this has become our standard for acceptable behavior. It is just as wrong for people to make those other "business decisions" you listed if they entered into the agreement without properly evaluating their ability to repay and they are reneging now out of convenience rather than out of inability to pay. This doesn't apply to just homeowners, it applies to anybody with a sense of decency.

  4. Anonymous,

    Get real. Find me one, just one, person who finds it CONVENIENT to walk away.

    For every one person you may find, I'll find you 10,000 who simply CAN'T pay it back even if they wanted to.

    It's a mute point really to ask people to behave morally....they simply can't in 99% of the cases.


    It's silly to make this a moral issue. It's a MATH issue. Banks (who are professionals) lent money to people (mostly financial novices) who had NO HOPE of being able to repay.

    My only suggestion is for those in a position where the math will mean they lose the house eventually anyway, don't let morality or guilt delay the decision long enough to totally annihilate your financial health. The quicker you accept the truth, the less money you throw down a hole.

    Average Joe

  5. And one more thing,

    If house prices were still going up 10% a one would give a Sh$t if you "walked away".

    Average Joe

  6. "It's silly to make this a moral issue. It's a MATH issue. Banks (who are professionals) lent money to people (mostly financial novices) who had NO HOPE of being able to repay."

    And whats funny is houses are still double to 4 times their prebubble values. The MATH issue is going to be an issue for a very long time until everyone who bought a home in the past 7-8 years walk away.

    I dont blame the average joe for not having morals, cause I enjoy watching about the immigrant Californian city bus driver cry that she is losing her $850K house on CNN. The stupidity in it reminds me of something in the jackass movie.

  7. It's a moral issue if your reason for not paying it back is because you simply don't want to. That is reneging on a promise and breaking a contract. Ever have someone break a contract with you and just say, "You shoulda known that I might break it, so tough luck." You'd be FURIOUS.

    It is different however if you simply can not pay it back. That's not a matter of choice, but necessity. THAT is why the house can be claimed as collateral, is for those occasions. Like those who lose their jobs and can't pay but choose to feed their families first.

    The guy in the CNN video that was linked in the "example blog" however, was NOT making that decision. He was simply underwater and didn't want to pay more than his house was worth. A quick "math" lesson will teach you though that anytime you take on debt and pay interest, you ALWAYS will pay more than your item is worth, that's how interest works.

  8. Is it moral to walk away - yes it is. What is not is not paying mortgage and staying in house, ripping away all the appliances, destroying the property.
    All those people who are teaching others about morality are the once who has no ethics. I know lots of people with high degree of morality and they walked away ethically from a mortgage they can not afford.

  9. Hey Anonymous:

    1. Pick a handle.

    2. The point of the diatribe was its absurdity. Do you really think the writer thought his credit card company should bail him out on his purchase? Get real.


  10. I think the portfolio writer's views are absurd. He is basically saying that the bank should take the loss since it was aware of the possibility that borrowers sometimes default. That's about as dumb a theory as I've seen.

    As to other posters comments about contracts/morality/etc.: Failing to pay under a mortgage contract does not mean you have complied with the terms of the contract. It means just the opposite, that you have not performed.

    In the event of non-performance, the non-performing party is in default and the counterparty then has remedies available under the contract in the event of default. That a party is in default makes it pretty damned clear that they aren't "following the contract."

    And contracts are to be entered into in good faith; that is, the parties intend to honor the terms of the contract and not default. So yes, morals and ethics are involved in contractual relationships. Entering into a contract in bad faith is fraud. And I certainly can't imagine anyone defending fraud as being morally appropriate.

  11. very good string here.

    The take home point seems to be that both parties, the borrower and lender, were swimming naked -and the tide went out.

    Just as Warren Buffet had predicted during the bubblemania days.

    Moral of story: It is a horrific sight when the tide goes out, and millions of ugle people are naked. So horrific that even those with suits are sickened.

  12. John Fontain says that it's a question of bad faith. So...are we to assume that the professionals at the bank who loaned a mind-boggling amount of money to a person who lacked the visible means to be able to repay it, for the purchase of an asset suddenly appreciating at a historically unsustainable rate, entered into that contract in good faith? It was only the borrower who acted in bad faith? I'd like for you to expand on that a bit, Fontain, if you could.

  13. A mortgage is an asset backed loan. A credit card is not. That is why the interest rates are different.

    You might get more mileage comparing the situation with buying a car and being upside down on it. At least car loans are asset backed.

    What do you suggest people do who actually don't have the money?

  14. i think that's why this is so bad--people don't actually have the money. sadly, i think they should lose the house (and whoever gave them a loan they couldn't afford should be fired).

    see, i would have LOVED to have spent the past 2 or so years living in any number of great houses in my area. i could have gotten an interest-only mortgage for those two years and paid less on the place than i would have on the not-so-hot rental i've been living in. i could string those two years out to three or more my missing some payments, getting into refinancing etc.

    then when all my options finally wear out, i can have the neighbors i priced out of buying help pay for me to stay in this nice house (contributing to my net worth as it were) while they're still treading financial water in rentals.

    all for the price of some bad credit? sounds like a good deal to me, actually.

  15. "all for the price of some bad credit? sounds like a good deal to me, actually."

    The funny part is, you could have never had good credit in the first place. Its not like you would have had a job or a credit check done when you applied for the loan!

    Gotta love how the system worked the past 8 years.

  16. A mortgage is an asset backed loan. A credit card is not. That is why the interest rates are different. Interestingly however, there is (and has been) very little difference in the rates between mortgages that were subject to deficiency judgements (Where the bank goes to a judge, and says, "Okay, we've got the house, now where's THE REST OF OUR MONEY?") and those where no defficiency judgement is possible. (eg first mortgages in CA)
    -Jim A.

  17. i think that's why this is so bad--people don't actually have the money. sadly, i think they should lose the house (and whoever gave them a loan they couldn't afford should be fired).

    Why would the loan originator be fired?

    Many if not most of these troubled loans were made by parties that didn't care if they'd ever be repaid. They made the loan, and sold it up the food chain. A lot of money was made for the people making the loans, because there was no downside. The appetite for mortgages (of any kind) was limitless.

  18. Great analogy.

    The missing piece is the Appraiser.

    Had there been an honest appraisal done on the grill, finding that it was only worth $82.00, and then the bank had refused to loan you the $200. in the first place, the whole thing would have been avoided.

    The real estate appraisers were corrupt and contributed to this mess, honest ones who refused to provide inflated appraisals were forced out of business.

    There has to be reform in banking and all aspects of real estate, if that means more regulations, bring it on!

  19. I have to say ,how pathetic that some folks threw caution to the wind in respect to the future and their ability to keep up with their own material monsters.The laws of nature still apply over all other laws...CONSERVATION is the answer to all these problems...LIVE with in your own means and prepare for the future as best as you can,being conservative with eveything is key to SURVIVAL now and then.
    Have Americans been so spoiled to believe the universe is obligated to supply us with all our big toys,houses and all our wants without patience ,self control and financial conservative morals?C'mon people let's not be so easily controlled with candy,oh yeah too late for alot of folks.Well, pay the piper,get up,dust off and freakin learn a real big lesson in NATURAL ECONOMICS.Don't gamble more than you can afford.
    old saying real simple "Pay as You Go and You never OWE!"
    On that note let me say I always believed debt to be slavery even as a young person and now I see my fears prove true through others.Good luck folks.But let not rampant wonton material greed and failure to be cautious about the future bring down our beloved USA.
    And GOD please bless America with brains again.