Is there a new real estate morality?
Remember when principles and ethics really meant something? When bank tellers would assume an overage would be returned to them and you could be pretty sure your lost wallet would be returned with the cash inside. Fortunately, most people still believe in principles of right and wrong behavior, but for some it’s a slippery slope, and its becoming too easy to justify marginal behavior.
There’s been a lot of criticism about the government’s mortgage modification program developed to help stem the tide of foreclosures. Most of the negatives center around the bureaucracy and paperwork required to get through the system and the banks’ lack of cooperation. But there is another negative associated with these programs centered around homeowners' behavior and their sense of responsibility.
Critics of these programs say it will never work because it doesn’t do enough to address negative equity, when people owe more on their home than the current value of the property, or being upside down. Without equity in their homes borrowers have little incentive to keep paying and are apt to walk away as soon as things get tough again, even after a mortgage modification.
In light of this, the government is now considering “re-equifying” borrowers by chopping the loan balances to something less than the home’s value in order to give the homeowner an incentive to not walk away. This may be fine for the individual who is benefiting from a re-equity arrangement, but what about his neighbor who has been paying his mortgage and is not getting a reduction on his principal? What’s to stop him from not paying his mortgage and walking away from his upside down home?
A few months ago I read an essay in the New York Times called “Just Walk Away.” The gist of the piece was should individual homeowners have any more of a moral justification from not walking away from their homes than banks and big business. It was a little frightening since this is the first time in modern history that people who can afford to pay the mortgage on their underwater properties are voluntarily choosing not to pay. The point was made that businesses, in particular Wall Street banks, make this type of business decision routinely. So why shouldn’t individuals view their upside down mortgages as just another business decision?
This way of thinking is a far cry from what Americans believed for generations. Most people would sacrifice anything to hang on to their homes and avoid the scarlet letter of foreclosure. But now many Americans already see walking away as a legitimate option if they can’t get a better deal from banks or can’t sell their property. Given that nearly a quarter of mortgages are underwater, and 10 percent of mortgages are delinquent, we’re lucky that more homeowners haven’t just walked away from their responsibilities.
The federal government keeps tweaking their policies in an attempt to get homes off welfare, but they're fighting a growing problem that now also may involve a cultural evolution. That being said, housing subsidies do have some positive effects. They encourage people to buy rather than rent, and since homeowners traditionally tend to take better care of their property and their neighborhood than renters do, it improves the stability of the economy and quality of life.
Is our morality doomed because of the real estate bubble? Let hope we’re just going through a minor reset rather than a major sea change and that the slippery slope will start to level off soon.
