More on Morals

This article in today’s Arizona Republic talks about Brent White’s paper (U of A Law Prof) on the double standard regarding the “moral” conversation surrounding strategic defaults on home mortgages.  I’ve cited his article in a previous post.  He also quotes my friend and colleague Don Loeb, with his thoughts on the subject.  One other point I would make is that in states with anti-deficiency protection, lenders factor in the bargaining point that they will not be able to seek a deficiency judgment if the loan goes south.  You pay for the right to walk away from your contract, via higher interest rates and other fees than states in which the lender is not bound by the collateral.  Also, as I’ve previously noted, the commercial institutions themselves (see the Morgan Stanley article) walk away all of the time, if it’s beneficial to breach the contract and leave their own lenders to the collateral, and there is no stigma or shaming involved.  Those contracts between commercial institutions are arms length bargains, much more so than the consumer vs. “lender” adhesion contracts that a potential homeowner must sign to buy a house.

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