I read this great post over on Dan Nunley’s site Law School Professor Encourages Homeowners To Stop Paying Their Mortgages. It really made me focus again on the age old argument about the moral angst people toil with when it comes to debt problems.
Individuals worry about what is or isn’t morally right when faced with debt problems. “It’s not right to not pay my bills.” But I just don’t see banks having those same conversations. Bankers will argue that morals have nothing to do with their business. Bankers have actually said to me their moral obligation is to maximize profit.
The main point, he said, is that too often people’s emotions get in the way of clear financial thinking about mortgages, turning them into what he calls “woodheads” — “individuals who choose not to act in their own self-interest.” Most owners are too worried about feelings of shame and embarrassment after a foreclosure, and ignore the powerful financial reasons for doing so.
Yet there is an inherent imbalance in the borrower-lender relationship that makes this morality message unfair to consumers, White says: Banks set the rules during the housing boom, handing out home loans with no down payments, no income checks and inflated appraisals. Now that property values have dropped 20% to 50% in many areas, banks have been slow to modify troubled mortgages and reluctant to reduce principal debts. Source
The morality position is so dangerous. Take the example of the single mother that felt it was not moral to stop paying her credit cards bills but did not have enough money to buy food for her and the kids so they skipped meals. As parents don’t we have a higher moral obligation to properly feed our kids?
When the bank raised the interest rate to the maximum amount on his credit card when Brian had never been late on his balance at all, was that morally right even though Brian signed a contract giving the bank permission to do pretty much anything they want to do to him?
Is it moral to stop paying your bills so you can tithe to the church instead?
This issue of morality is often hidden behind a curtain of other emotions like guilt, regret, and fear. That curtain makes it difficult for people to make good decisions when it comes to getting out of debt.
My opinion, when digging out of debt, the perceived moral position is important, but it needs to be placed in context and decisions need to be made that consider the persons current perception of morality but not based solely on it. I’ve just seen so much wrong done in the name of what’s right when struggling with debt.
“Woodheads” – LOL.
