Borrowers vs Lenders: Everyone Loses

I watched a short segment on CNN today about a person who had decided to let the bank foreclose on his house, even though he could afford to make the payments. I kind of thought that we were getting past this issue, but I guess not. So anyway, apparently this guy was under water on his house and the bank declined to work with him to restructure the mortgage, so he decided it would be better for him to just give the keys back to the bank. They called it "strategic defaulting," I think. In any case, the anchors were really on this guy about him being irresponsible - especially Ali Velshi. Ali was saying that, because of this guy's irresponsible behavior, it would be harder for Ali to get a mortgage. The other anchor was also on about how, if everyone violates their contracts like this, then contracts would be worthless. Both hyperbole.

Well, first of all, I don't think that Ali Velshi - CNN's Chief Business Correspondent - is really going to have much of a problem getting a loan, unless he is trying to finance a purchase of the Chrysler Building or something. But speaking to the point of his argument, maybe it's okay if people have a bit harder time getting loans. The ridiculously low bar set for lending is routinely cited as a major reason for the financial collapse in the first place. Besides, why is it that it is okay for a major business to default on loans and contracts, but not an average Joe?

And as for that charge that this guy was violating his contract, I am not sure that I see it that way. Sure, in a mortgage, the consumer agrees to make monthly payments, but there is also language in the contract for the possibility that defaults. In such a case, the property serves as collateral and the bank takes it back. It's all in the contract. Okay, I am far from an expert on this, but I have had a tiny bit of experience on it and I am pretty sure that is how it works. Anyhow, it seems to me that this guy just exercised his option to give back the collateral rather than to continue paying for a house that wasn't worth the payments anymore. And it's not like he didn't try to negotiate with the bank, they just refused. So it seems like the "contract violator" charge is a bit unfair.

I know that it might be a bit scary to think that there are all these people out there who are about to default on their mortgages, and that might send us into a second financial crisis, but there is a part of me that believes that, however painful it might be, this is part of the overall correction from our irresponsible past. Anyway, it is completely unfair to put all the blame on the consumer and none on the banks, whose predatory and irresponsible lending practices are a major reason for this whole mess. It is partly the fault of people who bought houses for investment purposes, rather than for living accommodations and it is partly (greatly?) the fault of major lenders who put the financial security of the entire country in the hands of risky borrowers with unstable incomes. There is also blame to be laid on us, The People, who believed in deregulation as the unassailable path to prosperity. In reality, I could keep going on and on about who is to blame, but the important thing is that there is plenty of blame to spread around so there is little sense in targeting some guy who has decided to exercise his right to opt out of his mortgage in exchange for losing his house.