We have become a country where people abandon personal obligations – even legal obligations – under the belief that there are no negative consequences to their actions. This mentality – reinforced by the escalation of nanny-state government – has evolved over the last fifty years, and has given Americans a license to be irresponsible. If we ever expect to get our budget under control, we need to put a stop to this behavior.
Recently, a client asked for some advice regarding a home purchased by one of his adult children. The residence had been obtained near the end of the up market, but had since lost significant value. They are now, in real estate lingo, upside-down on their loan, meaning that the loan balance exceeds the current market value of the property. I started by making a clear statement that I thought it immoral to walk away from a mortgage when the owners have the ability to make the payments. No one would begrudge someone who has been out of work for a year – or has undergone a personal tragedy of similar proportions – from the painful decision of foreclosure. It is quite a different matter when you decide to renege on your obligation because a realtor tells you that it will take years to regain the equity lost in this downturn.
I patiently explained what would happen to the client’s child (and his wife). This event would appear on their credit record for seven years. If they wanted another home loan, they would not be able to get one backed by Fannie Mae or Freddie Mac for four years. We looked at the effect upon most people’s next largest purchase – a car. We found that most car lenders would overlook the home foreclosure if the buyer otherwise had a clean credit record. But if there were other blotches, then the former homeowners could kiss goodbye the prospect of any car loan at all. It turns out that the young couple’s credit was pretty solid, which meant that their financial pain would likely be short-term and limited only to the purchase of a new residence.
There is always a bigger picture in these matters. These rules are relatively lenient in order to help a genuinely aggrieved person get back on his feet. America is a forgiving country, and most of us believe that someone who has suffered extended unemployment in this prolonged slump deserves an opportunity to reestablish themselves. But nowadays, people who would never have thought about abandoning their commitments are insisting that it’s fine for them. That is a dangerous path for this country to follow.
First because the prolonged housing slump has been exacerbated by people, lots and lots of people, doing exactly what my client was asking about. While there is no separate tracking of how many people who can make the payments are included in the foreclosure totals, empirical evidence indicates the numbers are significant. Even a couple of NBA players were noted as Walkaways. The recovery of the housing market relates directly to clearing the foreclosure backlog. If thousands of people are seeking foreclosure despite the ability to make their payments, the pain of the housing market will be prolonged, causing even more people to be upside-down on their loans and resulting in more walkaways. Quite a vicious cycle.
Second, who is paying for the losses on the loans? A knowledgeable friend of mine told me that a loan is an agreement between a bank and the homeowner. The bank evaluates the homeowner and makes an investment. That would be fine if the bank was the actual lender. But in almost all these cases, the lender is Fannie Mae and Freddie Mac – or more correctly the U.S. Government, and even more correctly you and me. The federal government has been pouring billions into these two quasi-governmental entities with no end in sight, and we won’t see the light at the end of this tunnel as long as people who can pay their mortgage continue to abrogate their responsibilities. When the final story is written about TARP it will cost about $25 billion, while Fannie and Freddie have received $134 billion already with another $100 billion easily needed before market stabilization.
In a short fifty years since my childhood, Americans have changed their attitude toward these matters. Personal bankruptcy, which had for generations been a stigmatizing event, has become a pedestrian matter with over a million Americans taking advantage of the process every year. Thousands of people negotiate reductions in credit card balances every day. Add to this the practice of embracing foreclosure due to a market downturn, and you start to witness a nation losing its moral compass. The people who take these actions are absolved of their obligations, but there is always a piper to pay. Ultimately, we all pay for these shortfalls in higher prices, higher bank fees, or in much larger government debt obligations.
No one would deprive a truly downtrodden individual the ability to utilize these well-established procedures. However, the cavalier manner in which our fellow citizens have grown to perceive these stopgap measures is not only harming our economy, but destroying our moral fabric. Turning around our huge national debt starts with each and every one of us taking responsibility for our own actions and asserting some moral backbone within our own circle of influence.
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