(Im)morality of Walking Away


An interesting piece in L.A.Times today:

Professor advises underwater homeowners to walk away from mortgages.

Brent T. White, a University of Arizona law school professor, says that it’s in the homeowners’ best financial interest to stiff their lenders and that it’s not immoral to do so.

Reporting from Washington – Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don’t feel guilty about it. Don’t think you’re doing something morally wrong.

That’s the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”

The majority of the essay is dedicated to the question of “self-interest” and how walking away from a bad mortgage is not as financially ruinous as it is presented by those who have an interest in people’s not walking away and paying their bills even though it is not financially feasible.

Although it is not very often that one encounters a piece on ethics in the “Real Estate” section of the newspaper, I wonder if it is indeed the time to raise a number of important ethical (and generally political) questions about the responsibilities of those homeowners who, having believed the ideology of “everyone should own a house” during the boom, bought a house they could or could not afford and are now stuck with payments on the mortgage that is much higher than the price of their house. Are they obligated to continue paying their mortgages? Legally, yes, or so it seems. White seems to argue two points, and I’d like to read his original essay as well when I have time (it’s available on SSRN), that are not necessarily connected: a) walking away is not as financially ruinous, you will be back on your feet in a couple of years (although banks seems to dispute the numbers here, but it’s of course in their interest to do so), b) it is not immoral to do so, because you are to act in self-interest and being stuck in abusive bank-homeowner relationship is not good for you in the long run.

It is clear here that ethically speaking one would be screwed if one were a consistent Kantian (as people keep accusing me of being, including sending me annoying emails pointing out how inconsistently Kantian I am even though I keep repeating that I am not in fact a Kantian) – regardless of the consequences of your promise to pay off your debt, you must do so because you promised to do so. What clearly shows Kantian deficiency here is the fact that, according to the article, banks and homeowners are not equal legal or social subjects: banks have all the power, including the police that will come and kick you out of “your” house, homeowners have almost no power, whether now or before when they were getting their mortgage. Of course, it is not in the interest of the banking industry (or financial industry in general) to emphasize that disparity. Remember those commercials for “The Lending Tree” with their slogan – “When banks compete, you win“? Well, it turns out that it might not be that good for you as banks don’t seem to be competing that much.

What seems to be the main assumption here is that banks are people, like in that movie that most Americans seem to enjoy around Christmas without drawing too many implications (“It’s a wonderful life” – what a strange title!), but they are not, not anymore, and they probably never will be. They are large institutions concerned only with their own financial situation. They can fail and they are insured. They can be “too big too fail” and they can be “bailed out” and that somehow helps the economy.

The point about “social shame” I think is the most interesting point in White’s argument, and it is here that we need to look for interesting ethical issues: it is shameful to walk away from a ridiculous mortgage because it is a sign of failure and no one wants to be a loser in this country. This shifting of moral shame and guilt onto the consumer, onto the citizen, is the main ideological mechanism in the contemporary culture of the US, it seems to me. Can’t get a job? Didn’t try hard enough, didn’t go to the right school, didn’t get in the right school, because you were lazy in high school or middle school or kindergarten. Didn’t get a good grade in class? Didn’t listen carefully enough, didn’t read the assigned readings, didn’t think correctly. Didn’t get the perfect life, full of happiness and private property? You are not American enough, you are lazy and unproductive member of the society, you must be ashamed of yourself. No one talks about the systemic oppression anymore, about the inequalities and injustices that are the very foundation of any capitalist arrangement, it’s depressing, it’s against the American spirit of industriousness and self-starting enthusiasm: stop blaming others (the banks, the politicians, the corporations, your parents etc) and start doing something about it. Unless, of course, it involves walking away from your financial obligations to the system. Pay off your mortgages, descend to the lowest level of financial ruin and then do that self-starting thing we told you about.

Disclaimer: I do not have a mortgage. The question here is not whether people should pay their debts, clearly they should by the general consensus on how our society is organized and must function. However, there is a sense in which White is not talking about the practice of simply walking away from your obligations whenever you feel like it, he is talking about a kind of social revolution where people walk from abusive financial relationships all together thus creating a kind of civil disobedience movement – is such a movement still possible in this country? Maybe, but I’m not very enthusiastic. Look at the so-called “tea party movement” – clearly most of those people are just upset losers of the election, but some are probably generally upset about government spending or any of the other issues that they are concerned with. The problem, of course, is that it is not a real movement of the people, it is an orchestrated spectacle that serves the interests of those in powerful institutions that are ironically screwing up those very people who march on DC. As Thomas Frank’s image would have it, it is the sans-cullotte marching for the rights of the aristocracy and this is why it is generally not a very influential political event and wouldn’t be even if they gathered millions and marched them to DC every week – it is not the numbers that make a movement, it is the message which they do not have.

Enter Sarah Palin. I’ll confess I still remember the moment I learned that name: it was the morning of a non-teaching day. My wife was leaving for work and she told me: “Hey, John McCain announced his running mate.” To which I responded, being half-asleep still, “Who?” – “Sarah Palin” – “WHO?” – “I think she’s the governor of Alaska or something” – [general puzzlement]. As we learned later, she was quite a lady and all. But the latest accusation against her is that she is a quitter – she quits everything she starts and it’s not very American. But what exactly is the shame of quitting? Of course, in Sarah Palin’s case it’s just a kind of meta-accusatory strategy: she is horrible and she is also a quitter. It’s seems to me that the ideological weaponry of capitalist psychology is here at works as well: nobody likes a quitter, you must work hard no matter how oppressive and abusive the situation is, you must keep your promises, you must be consistent and honest, otherwise we cannot buy your labor power and have any guarantees that we are in fact buying anything. Morality as such is in the service of capitalism? What a novel idea! [Sound of a head exploding] I must go and think about it really really hard…

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4 thoughts on “(Im)morality of Walking Away

  1. It should be pointed out that, according to Kant, everyone involved in the mortgage mess was acting unethically even before the properties went underwater.

    There are at minimum three parties involved in every mortgage: buyers, lenders (banks) and builders. The builders often built houses specifically for “subprime” buyers knowing that banks were willing to lend money to people that they normally wouldn’t consider. The banks lent the money without examining the risk closely enough and usually with assurances to the buyer that they were receiving “free money.” The buyers were often “willfully ignorant” about their ability to pay for the mortgage in the event of an economic downturn.

    Years ago all of this would have been considered “negligence,” but the practice basically devolved into “lying”: the complected nature of securitizing mortgages creates enough hoops and obstacles that are designed to incentivize disguising risk.

    I haven’t gotten to White’s paper, but I find it hard to disagree with the LA Times recap for two reasons:

    (1.) The buyers did not receive the goods they were promised. There isn’t a real estate agent in America who tells a potential buyer that a property might decrease in value. This is real estate we’re talking about. It’s supposed to be the safest investment available. In just about every case during the current mortgage crisis, it was the house that declined in value — not necessarily because the buyer lost his or her job or was lazy, etc (I can go into why this was later, if need be). In many cases this could be considered very kosher under a Kantian ethics, but it all depends on the details of each specific case.

    Reason (2.) is more Utilitarian. Many of the houses that people are abandoning are in subdivisions or communities that were specifically created to accommodate “subprime” lending. The social ramifications of keeping these perpetually indebted class of people in their homes would be disastrous. It would basically be like creating semi-suburban ghettos. In some cases these “subprime” communities are being razed to prevent this from happening.

    There is a third reason that has more to do with social safety nets and moral hazards, but we’d be moving from philosophy into economics, and this question is more interesting when it’s just about ethics.

  2. Thanks for your comment, JB. I agree with you that if the conditions of the original agreement/promise are such that if they are not fulfilled, one can consider walking away from the agreement and that would not be very un-Kantian as long as the intention was to fulfill the agreement. I don’t think I’m qualified to comment on the legistics of contract law or economics of housing booms or real estate. I do think however that we can imagine an ethical situation in which you have an obligation to the bank that you can break without acting unethically if you are guided by self-interest, which was the point of the essay, I think.

    I think you and I agree that this issue is much larger than a simple individual decision – this particular scenario calls for a kind of communal ethics: how do we act as a community of citizens in the situation in which we as individuals have no power? Bank won’t renegotiate mortgages because they “feel bad” – they can only be forced to do so by some communal action.

    My main interest in this story was, however, a kind of “moral sentiment” angle – we are brought up to honor private property, tell the truth, honor contract obligations and so forth, and all of these moral rules are great, don’t get me wrong, but in critical conditions such as ours it’s pretty obvious that notions of “social shame” or other affective moral arguments are in the service of the ruling class, in the service of the system that exploits people guilting them into paying for goods that are no longer worth paying for.

    If I bought a car and got a car loan to pay for it, and the car was quickly devalued and turned out to be quite shitty, despite all of the cool commercials and salesman’s promises, if I refuse to pay for it, it will be taken away and I’m fine with it. I made an agreement based of the information I had at the time, I changed my mind and I changed my contract (broke it, if you will) – people/organization breach contracts all the time, it’s a matter of weighing your options. It’s only because of the culture of shame and winner-loser that 15mils (I think that’s the number) of homeowners are still paying their mortgage for houses that are not worth it.

    My other issue here is that someone is making money off people who can barely make ends meet paying their mortgages for nothing but some vague sense of social status and recognition and no one seems to be talking about that aspect of the financial crisis. As David Harvey likes to say (quoting someone I forget now): “During crises, the assets return to their owners” – rich get richer and poor get poorer because they have some moral obligations to the larger capitalist system that they believe will one day help them as well…

  3. Here’s an interesting personal tale about someone trying to act ethically (and, alas, how it’s hard out there for someone who is). In so many ways, Ms. Ramos story can be grafted onto the mortgage crisis.

    I think this story illustrates your point about “social shame” being a tool wielded by one economic class against another. In this case, however, the person who believed she was acting ethically, was “shamed” by being fired most likely to be made an example of to her fellow co-workers.

    If this is how banks “treat their own,” just image what they do to debtors…

  4. That’s a great story, but I’m not sure I like the final paragraph:

    Banking shouldn’t be some kind of cat-and-mouse game where the bank tries to squeeze as many fees as possible out of you while you try to avoid them. Banks are treating their customers like the enemy (see Peter Goodman today on Chase, or of course the famous IndyMac case), and that’s not something which goes down well in today’s economy, where banks seem to be the only individuals or businesses making vast amounts of money. And yes, all of those profits were formerly our money.

    All profits are formerly somebody’s money – this is of course very simplistic but “making money” is not just creating them out of nothing, someone is producing the value behind those monies – again, pardon my lack of economic sophistication. Banks are out to make a profit and only strict regulatory policy of the state that is willing to protect its citizens (if there is such a state) can stop the abuse. The idea that banks would somehow get a conscience and stop the abuse themselves is silly.

    Look at this story, I mentioned it in class today and almost everyone was outraged but not many could explain why or how we should punish those responsible (if anyone is actually responsible). No one is responsible in that case, it’s all “third-party responsibility” – it’s the problem with our bureaucratic arrangement. The person from BoA decided to act responsibly and she was out – they need a cog in the great money-making machine, not an ethical subject.

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