Monday, December 21, 2009
There has been some recent discussion about the morality of ruthless (or strategic) defaults in which a homeowner voluntarily defaults on a non-recourse mortgage loan (surrendering the property to the lender), although they are financially able to continue making the payments, because the property value has fallen far below the amount of the loan balance. A non-recourse loan is one in which the borrower has no further legal obligation after surrendering the collateral even if the value of the collateral is insufficient to cover the loan balance. This does not strike me as particularly wrong so I guess I come down on Salmon's side. However I think his justification that it is OK because banks are evil is wrong. The idea that it is OK to cheat evil people puts you on a very slippery slope. The way I see it you are just exercising one of your options under the contract. The same as if you refinance because interest rates have fallen, an option which is also unfavorable to the lender. The value of these options should be priced into the terms of the loan. Since you are paying for the option I don't see any problem with exercising it when advantageous.