Moral Hazard

Chess Game

I’m going on the record to say something completely radical and unpopular: I would rather see a strategic default than a reduction in payment.

Why? Because you’ve got to prevent irresponsible homeownership and draw hard lines in the sand between behavior that is productive to society and behavior that is not.

If one house on a street receives a reduction in payment, what’s to stop all the rest from pursuing the same outcome? And then where does that leave property values in that neighborhood? How does that bode for property sales?

If there is no consequence to irresponsible behavior, the behavior never stops. When you can live in your house for more than three years without paying your mortgage, what else will you take chances with? How else will you hurt our economy?

The taxpayer is the one who pays for reduction in payment and non-paying borrowers. I’m sorry that things went a different way than you anticipated – that your house depreciated instead of appreciating. The thing is, nobody was promised a perfect world. Bad things happen. That’s why we have bankruptcy and other judicial remedies for people in trouble.

We create a moral hazard by relieving people of blame and say inaccurate things like “nobody saw this coming.” We not only saw it coming – we helped create it by living beyond our means and rationalizing it.

There has to be some balance to keep bad behavior from becoming widespread – in our industry and elsewhere.

Once you consider a principal reduction, you open the door to walking away from other debt and believing there is no consequence, no penalty, to stupid spending. And if you can not only get a slap on the wrist and financial relief, but also a new mortgage a year and a half down the road, why, we’re creating criminals.

It’s difficult to sometimes say the things that really are true because the truth hurts; there can be some really ugly consequences.

I’m OK with it. I’m comfortable taking a public stance on an uncomfortable topic because I’ve experienced both sides of the coin and I see no benefit in irresponsible behavior. There have to be ramifications for decisions we make – it isn’t OK for everybody. That everyone-wins-and-no-one-loses mentality ended in Kindergarten.

In the end, it hurts everyone. No one escapes unscathed.