A Nation of Moochers (22 page)

Like other strategic defaulters who “are refusing to slink away in shame,” the
Times
said the couple regarded foreclosure as “a blessing.” They were utterly post-stigma. “Foreclosure has allowed them to stabilize the family business,” explained the
Times.
“Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.”
²

But the couple’s nonpayment of their mortgage had an additional wrinkle: They also refused to leave their house.
The Times
explained: “This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can.”

Like thousands of others, Pemberton and Reboyras have figured out how to use the law and the system to prolong their squatting. They hired a lawyer who works to stretch the time between default and eviction; in Florida the average house is in foreclosure for more than five hundred days. The
Times
noted that their lawyer sends out thousands of letters to homeowners in foreclosure, assuring defaulters that even if they have no defense, “you may be able to keep living in your home for weeks, months or even years without paying your mortgage.” In other words, he was offering Guilt-Free, Perfectly Legal Squatting.

The couple rationalized their mooching by blaming the banks. “Any moral qualms,” explains the
Times
, “are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.”

Pemberton and Reboyras fit the profile for many homeowners who are underwater on their mortgages. According to the
Times
, at the time they stopped paying, they owed about $280,000 on a house worth less than half that amount. But their debt problem was only partly owing to the real-estate crash. The couple ran a business that restored attics infested by rodents or other pests and at one point used their house as an ATM to fund their business, “taking out cash to buy a truck they used as a contest prize for their hired animal trappers.”

Even after the crash and their default, they have no regrets about their choice to frivolously run up their debt. In fact, they blame the bank: Pemberton called the bank’s decision to loan him the money a “stupid move.” Recall that they took out a loan on their home to buy a truck. Not for their own use, but as a “prize.”

“They went outside their own guidelines on debt to income,” Pemberton explained to the
Times.
“And when they did, they put themselves in jeopardy.” Especially when the couple decided that they had no intention of repaying the loan. Instead, the couple decided to take the money they paid for their mortgage and apply it to their business, by buying “print ads, then local television.” And, since they were now living rent free, they also had cash left over for the trips to the Hard Rock Casino and steak dinners out.
*

It was all quite wonderful, explained Pemberton. Instead of being a weighty and costly obligation, their house had become “a life raft.”
^†

Shedding the Stigma

Predictably,
The New York Times
story generated a backlash. “It’s sickening, really,” wrote blogger Cassy Fiano. “There are people out there milking the system for all it’s worth, taking no responsibility for their bad decisions, and then blaming the lenders when they end up in trouble.… Apparently, the right thing to do is to squat in a house you don’t even fully own yet without paying what you legally owe.”
³

The vast majority of American homeowners agree with Fiano, but the Walk Away from Your Mortgage Movement was also gathering intellectual and journalistic momentum. The spread of strategic defaults illustrates the cascading effects of rewarding bad behavior, part of the “grab yours while you can” attitude that sometimes cloaks itself in the rhetoric of pseudo-Marxist egalitarianism, sometimes in the posture of hardheaded economic realism. Whether the argument is made from the left or the right, the case for stiffing lenders requires the rejection of the fusty middle-class morality that had led homeowners in the past to strive to pay off their mortgage even in the toughest times and the elimination of the lingering stigma against being a deadbeat.

In other contexts (most notably the stigmas against out-of-wedlock births or other forms of dependency) we’ve seen how quickly such stigmas can be eroded. The campaign to raze the remaining stigmas against defaulting on one’s financial obligations is already under way in earnest.

Brett Arends, writing in
The Wall Street Journal,
urged millions of underwater homeowners “to stop living in a dream world and give serious thought to walking away from the debt.” Arends noted that many people are “hung up on middle-class morality. But he offered absolution: Shame is naive in the current economic world. Arends concluded: “The economy is fundamentally amoral.”
⁴

Roger Lowenstein, in
The New York Times,
also rejected the notion that such defaults should be considered “antisocial and perhaps amoral.” In a market society, he argued, “we are all economic pinballs, insensibly colliding for better or worse.”
⁵

But perhaps the strongest voice urging Americans to walk away is University of Arizona law professor Brent White, who frets that homeowners “should be walking away in droves. But they aren’t.”
⁶
And like Arends and Lowenstein, he blames the troublesome middle-class ethos of personal responsibility.

“It is time,” declares White, “to take morals out of the picture and search for an equitable solution to the negative equity problem.” Not only does Professor White want homeowners to get over their lingering sense of guilt, he goes further by suggesting they rev up their spending before they walk away from their mortgages, the better to enjoy their newfound freedom from responsibility. He suggests that defaulters can minimize the “marginal cost” of a trashed credit score by going on a spending binge before defaulting. “For example, one could purchase a new vehicle, secure a new home to rent, or even purchase a new house before beginning the process of defaulting on one’s mortgage. Most individuals should be able to plan in advance for a few years of limited credit.” Of course, this requires suppressing any lingering moral qualms, which is, of course, the whole point of the walk-away movement.

In his essay “Underwater and Not Walking Away,” Professor White complains that society has discouraged homeowners from defaulting on their mortgages. “The clear message to American homeowners from nearly all fronts is that one has a moral responsibility to pay one’s mortgage,” writes White. “The message is conveyed not only by political, social, and economic institutions, but by the majority of Americans who believe that voluntarily defaulting on a mortgage is immoral. This stigma leads Americans to overemphasize the impact of a foreclosure on their credit.” White argues that a bad credit score actually costs a few thousand dollars, far less than they would save by walking away from an underwater mortgage. But, complains White, middle-class Americans perceive it as a black mark to be avoided at almost all costs. “A bad credit score is—by design—meant to reflect not only one’s poor creditworthiness,” says White, “but also one’s poor moral character.” It is “nothing less than a reputational scarlet letter” that follows individuals wherever they go.

This is all quite unfair, he argues, because “norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility.” Meanwhile, “individual homeowners are encouraged to behave in accordance with social and moral norms requiring that individuals keep promises and honor financial obligations.”

One solution offered by White is to amend the Fair Credit Reporting Act to bar lenders from reporting mortgage defaults and foreclosures to credit rating agencies. “Preventing lenders from reporting mortgage defaults to credit rating agencies would, as a practical matter, eliminate lenders’ ability to hold borrowers’ human worth as collateral.” This would undoubtedly be successful in raising the self-esteem of defaulters, but it would also render credit scores essentially useless as a guide to the creditworthiness and history of would-be borrowers. By making the lending process even less transparent than it now is, White’s proposal would add even more uncertainty to the process, while setting the stage for precisely the sort of abuses that created the housing bubble in the first place. The whole point, after all, would be to make it easier for people to obtain loans even though they had reneged on previous commitments.

But White is looking for more than technical changes in credit reporting: He is also advocating a cultural sea change. “It is time to put to rest the assumption that a borrower who exercises the option to default is somehow immoral or irresponsible,” he declares. “To the contrary, walking away may be the most financially responsible choice if it allows one to meet one’s unsecured credit obligations or provide for the future economic stability of one’s family. Individuals should not be artificially discouraged on the basis of ‘morality’ from making financially prudent decisions, particularly when the party on the other side is amorally operating according to market norms.”

A Moral Obligation

But what exactly are those morals that White and the others so disdain? The critics specifically object to the belief that one should keep his promise, fulfill his obligations, and pay his debts if he is able to do so.

In fairness, some small businesses who tried to play by the rules were foreclosed upon by their banks, who also abdicated their responsibility to deal with them in good faith and thus undermined the sense of moral obligation on the part of other borrowers. This has potentially serious consequences because one of the most important factors in keeping the housing market afloat is precisely the imperative most Americans feel to live up to that moral obligation. The nation’s culture of homeownership was based on a culture of such personal responsibility; the attitudes and values of middle-class America that made the single-family home the centerpiece of the American Dream are not separable from the middle-class sense of obligation that transcended issues of cash flow and made the market work for generations.

An influential study for the National Bureau of Economic Research documented the “surprising” importance of moral considerations in decisions about whether or not to default.
⁷
The study by Luigi Guiso, Paola Sapienza, and Luigi Zingales found that 80 percent of homeowners thought it was immoral to strategically default on a mortgage. Among those who had moral qualms, homeowners were 77 percent less likely to default than those who took the “amoral” position. The objections to walking away from mortgages was so powerful that the researchers found that only 17 percent of homeowners said they would walk away even if their equity fell to just 50 percent of the value of their house. “This moral barrier to default is an important and often ignored aspect of the default decision,” they noted.
*
In other words, as White noted, “people are less likely to default if doing so will make them feel like immoral or irresponsible persons—and are especially unlikely to default if they believe others will think of them as immoral or irresponsible persons. Guilt and shame are powerful motivators.”
⁸

One study of foreclosures, for instance, interviewed a homeowner who worried about being seen as irresponsible: “And, um, so I’m just, I’m kind of interested in the public perception. You know I don’t want to be a burden on the rest of society because I’m not paying my mortgage. Now there’s this big giant bailout and I’m involved in that. You know, my mortgage was one of the mortgages not being paid.”
⁹

But as strong as the stigma against default was, the NBER study found that it could be eroded by two factors:

1. Public policies and bailouts that seem to subsidize irresponsible borrowing and that make homeowners who continue to pay their mortgages feel like suckers. “Moral norms, if widespread, may strongly mitigate the likelihood that American households will default on their mortgage, even if the value of housing continues to depreciate. The effectiveness of moral rules, in turn, may be affected by economic policies that may undermine a sense of fairness.… For example, a policy aimed at helping people in arrears with their mortgages could have devastating effects on the incentives to strategically default of people who can afford to pay their mortgage if it is perceived to bail out people unjustly and thus undermine the moral commitment to pay.”

2. A breakdown in social norms, or what researchers referred to as “contagion effect that reduces the social stigma associated with default as defaults become more common.” In other words, if people begin to see their neighbors walking away from their mortgages without suffering obvious negative consequences, they are more likely to do it themselves. The study found that “people who know someone who has strategically defaulted are 82% more likely to declare their intention to do so.”
¹⁰

Credit, Character, Culture

This is where economics meets morality and finance meets character and culture. White and others argue that the economy is fundamentally amoral and that it is time we all recognize the anachronism of middle-class concepts of responsibility and moral reciprocity. Ultimately the issue comes down to the question: Why do we pay our debts? Because it is convenient for us, or because it is in our economic interest to do so, or because it is the right thing to do? Paying what one owes, like keeping one’s word even if it is inconvenient, is a sign of personal responsibility and a marker of good character. If it were not, we would make no social or moral distinction between the spendthrift deadbeat and the responsible and trustworthy. In that sense economic arrangements reflect social norms and vice versa: Debt is a moral as well as a financial exchange. Remove the connection between character and financial trustworthiness and the system is changed in fundamental ways; so is the cultural fabric and the social contract on which the American economy has been built.