Morality versus Business Sense – Home Mortgages

Roger Lowenstein, one of my favorite columnists, has written a piece on the morality of some peoples decisions to “Walk Away From Your Mortgage!”  His article appears in Thursday, January 7, 2010 New York Times Magazine.

http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html

The issue that he tackles is the growing trend of “voluntary” home mortgage defaults.  According to his statistics, 10.7 million families owe more than their homes are worth.  Many people in this situation are choosing to cease paying their mortgages and facing the consequences of that decision.  Just to be clear, Mr. Lowenstein is specifically referring to people who still have the ability to pay but choose not to.  They are, by and large, making this decision based on sound financial calculations.

What I find most interesting about this are the parallels that are drawn between businesses that choose to make the same types of decisions.

There is a self-preservationist belief in the mortgage industry that what these people are doing is morally reprehensible.  By that same logic, what corporations do when they choose to cease the repayment of debt is morally reprehensible as well.

Mr. Lowenstein’s conclusion is as follows:  ”No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.”

My take on this is not in conflict with Mr. Lowenstein’s but is, rather, from a different angle.  The foundation of my argument is the assumption that corporate america is acting on the belief that behaving in this morally reprehensible way is in the best interest of their company, shareholders and most importantly themselves.

From that viewpoint, it does make sound business sense to do things like default on debt that the companies have the ability to pay.  The Mortgage Bankers Association’s take on this is valid, to a point.  While it is not possible to argue that this behavior is wrong, it is possible to argue about the sound business reasons that support the decision.  The view is a very short sighted one.  The decision not to behave in this way can have long term positive consequences for companies.  These consequences are similar to those that will face home-owners that do this.  But these home owners will only face these consequences for a short period of time, as little as 7 years.

Corporations who default on debt that they have the ability to pay face long term damage to their credit ratings, their ability to instill faith in their ability to perform as a partner, their ability to negotiate deals and damage to the business partners that they have brought in to their deals.  These decisions reap short term benefits and long term damage.

I do not think that it is a stretch to believe that the economic cost of these decisions will, over the long term, far exceed the benefits.

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