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Sunday, March 7, 2010

Underwater Mortgages

By Daryl Luna, Editor at:

In Defense of the Constitution

The “Great Recession” has hit almost every sector of the economy. Times are tough, people are out of work, and paying the bills is no easy task for most. Therefore, many are falling increasingly behind on their mortgages, paying for homes that are worth substantially less than when they were first purchased. In light of this, Washington Post columnist Brett Arends advises readers behind on their mortgages to stop making payments altogether in his
recent article.

Mr. Arends contends that you should neglect your payments, offering that “No, you shouldn't feel bad about it, and you shouldn't feel guilty. The lenders would do the same to you—in a heartbeat.” Likewise, he claims that you should not worry about meeting your obligations because “the economy is fundamentally amoral.”

Needless-to-say, I am fundamentally opposed to Mr. Arends’ opinion. I understand the hardship, and I do not want people to suffer in order to make payments. Moreover, many of these people are victims of the government’s intervention into the economy, which makes the situation even worse. But the solution is not to shirk responsibility. Rather, if a contractual agreement was made, that needs to be honored. We should sympathize with those who have legitimately fallen on hard times, but we should not encourage bad behavior.

Contracts are an important part of a free society. They protect our relationships and property, while providing for commerce and employment. In fact, our Founders valued the right of contract so much that they inserted a safeguard against the government violating contractual obligations into Article 1 Section 10 of the Constitution. That being said, a free society can only operate when contracts are honored—whether it be a contract between the government and the governed or between individuals conducting business. Therefore, when we refuse to uphold contractual obligations, there are always consequences.

When one refuses to pay his mortgage the expense is passed on to us all in one way or another. If payment is not made, the companies must make up their investment. That then gets passed on to others, whether it is in the form of higher lending rates in the future or through taxation as the government bails out lending institutions. In our current environment of irresponsibility where no one is called to answer for his/her actions, it is more important than ever to note that common practice does not always equal right practice. When we look at the consequences of not meeting our contractual obligations as noted above the reason should be quite evident: no one else should have to pay for another’s failures or successes.

When considering the ethics of the situation it is important to put the entire ordeal in context. Though it is a large one, a house is a commodity just as much as the next thing. Would those who support refusal to pay mortgages support someone failing to pay for other things? Should someone walk away from a restaurant without paying for dinner? Should a boss not pay an employee the agreed upon wage? Of course not.

Moreover, just like any commodity, value changes over time even with houses. If a house is no longer worth the price agreed upon at purchase, is it the fault of the mortgage company? Surely not. When we purchase items, we take risks. Sometimes those purchases pay off; other times they do not. What is consistent throughout is this: one has the right to keep the fruits of one’s labor (a basic belief of classical property rights theory). Those fruits can be ripe and pleasant, or they can be bitter and hard to swallow—either way they are one’s own fruits to keep, not to pass along when found undesirable.

What’s sure, not paying your mortgage has a number of problems. It fails to address practical concerns. It is philosophically opposed to proper positions on responsibility and property rights. And it is simply put, lying…fraud…you pick your title.

But does all this really matter? I would say, “Absolutely!” We as libertarians must practice what we preach, while standing up for our values. The willful breaking of a contract is an affront to our principles; a free society cannot exist without contractual fidelity. And I am convinced the reason why Mr. Arends suggests breaking contractual obligations in his article is that he is opposed to libertarian principles.

Clearly, Mr. Arends' problem seems to go beyond a concern for those struggling to pay their mortgages as evidenced with his language of amoral economics. He has a problem with capitalism, but he is wrong in the matter. Capitalism must be moral in some sense—not that its morality adheres always to a particular sectarian worldview, but it does adhere to some common standard of justice. A simple example is capitalism’s basis in property rights. If capitalism presupposes that theft is wrong, it operates under a moral claim. Therefore, it cannot be amoral, and Mr. Arends' appeal to amoral economics in our case is unfounded.

Secondly, I believe his problem with capitalism is highlighted by his statement “…you shouldn't feel guilty. The lenders would do the same to you—in a heartbeat.” Really? That is his reasoning? Should I break into a thief’s house because he would break into mine, if given the chance?

Arends is obviously upset with lenders—and rightfully so as many of them have been on the government dole as of late. I, myself, am upset with lenders and our very own government which created malinvestment in the housing sector through its misguided policies and FED-set interest rates. Government forced and incentivized bad loans to be made to people who could not afford them, and it bailed out institutions that failed to act responsibly. So this is definitely an area for blame to be placed. The corporations who bought these mortgages as bundled securities need to be held accountable, instead of being bailed out. But that does not mean that individuals are not responsible for their own choices as well. We must each determine for ourselves what we can and cannot afford before entering a contract; that’s no one else’s job but our own.

Back to Arends- I suspect his problem with lenders is not exactly the same as mine. For, he seems content to add to the government dole by encouraging people to stiff lenders out of their rightful pay. So what is his problem? That is hard to say, but this much is obvious: he has difficulty seeing the right thing to do. Tit for tat methods are not needed, and continuing the policy of contractual infidelity and property rights undermining will not solve our problems. In fact, they caused our problems.

Mr. Arends’ piece is fundamentally flawed. And I urge any that value liberty to fight back against his suggestions. The idea of contractual fulfillment and responsibility may to Arends seem “a gallant but completely out-of-date plan of attack—like an old-fashioned cavalry with plumed hats and shining swords charging against machine guns,” but sometimes old-fashioned isn’t all that bad; the Constitution is old-fashioned. I like it just fine.


  1. I have had this quandary myself as I could buy my house now for less than half what I paid in 2005. And since my mortgage is backed by the FHA, it does not hurt the bank one bit, onLy my fellow taxpayers if I walk away.

  2. I hate how this system wrecks the finances of everyone in its path except for those well-connected to the establishment. I absolutely, positively hate it.