New Year's Eve, Alcohol, Mortgages and Morality

Several years ago at the height of the housing crisis, I was at a New Year's Eve party. A friend of ours who held a senior position in a local credit union (let's call her J), was complaining about the number of people who were committing strategic defaults (walking away from mortgages that they could afford but chose not to pay because the house had negative equity).

"The law should be changed to prevent them from doing that," said J in between sips of her adult beverage.

"Why?" I asked.

"Because it is immoral," she quickly responded.

Now, those who know me know I like a good discussion. The more controversial the position, the better. So given this setup and the fact that I too had consumed several rounds of pre-midnight libations, a discussion was going to occur.

A - "Let me ask you a question. Let's assume that before this crisis, you had a customer who had made 29 years and 6 months of timely mortgage payments on their home and got cancer right at the end so that they couldn't afford to make the last six mortgage payments. Is there any scenario under which the bank would not have foreclosed on them?"

J - "No."

A - "So explain to me how that would have been moral? You've got a customer who's done everything possible to comply with the loan and through no fault of their own, they've suffered an illness that makes it impossible for them to pay their loan."

J - "We are just doing what the mortgage agreement allows us to do."

A - "Well aren't the people who are strategically defaulting doing the same? A mortgage spells out the agreement of the parties. The bank lends the money, the borrower makes the payments. If the borrower doesn't make the payments, then one of the remedies the bank has is to seize the house and sell it to recover its money."

"For almost all of the last 80 years, that was a remedy that was very favorable to the banks because people's houses usually went up in value. Now if the borrower must be bound by that remedy, why shouldn't the bank also be bound?"

"It seems to me that you want to impose an after the fact, unilateral, morality clause on the borrower. So how exactly is that either fair or moral?"  [This draws a chuckle from the small group of other friends who have gathered around as we were discussing this.]

J - "F*ck You, Alex."