Monday, May 10, 2010

selective default?

I was watching TV the other night, and I saw a story on "selective defaulting". This is where you walk away from your mortgage because your house is worth less than you owe on it. This is different than foreclosure or defaulting, where you cannot make payments because your circumstances have changed. No, these people CAN pay, they just don't want to.

This bugs me. You borrowed the money. The bank agreed to lend it to you. You agreed to pay the loan back at so much money per month for the term of the loan. The bank does not promise you that you will make money on your investment. Some investments don't work out. You can look at my stock purchase of CISCO at the absolute peak of the internet bubble as an example. I bought stock for over $300 a share, because it was a "can't lose" proposition. Analysts rated it a "buy" when I bought it. It's worth about $40 a share now. That's how the universe works sometimes.

When you walk away from a debt that you have the means to pay, you are cheating the system, and to a lesser extent, you are cheating all of us. Because the money comes from somewhere. When you stick the bank with a worthless property, instead of paying your obligations, the bank has to charge more for services, or tighten up on foreclosures, or give fewer loans, or fail. When you signed those loan papers, you gave your word. You promised that you would pay off what you borrowed.

To be clear, I am not talking about people stuck in the nightmare of foreclosure or bankruptcy. If you can't pay, you can't pay. Shit happens. You aren't in control of all the circumstances of your life. People get sick. They lose jobs. They suffer runs of bad luck that eat at savings. The agreement with the bank says you will pay if you are able, and the bank will foreclose if you can't. In bankruptcy or foreclosure, both parties have held up their sides of the agreement.

This is different than the people who simply "walk away" from their responsibilities; the ones that have the means, have the ability to make payments but just don't want to. Be ethical, be responsible, and pay what you owe. Otherwise you are no better than the wall street thieves that helped cause the housing crisis, and almost destroyed our economy.

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