Rational Economic Decisions

by digby

The LA Times reports that “strategic defaults” comprise a fair number of mortgage defaults these days. These are people with good credit scores who are keeping up with their mortgage payments who nonetheless walk away from their mortgages. The reasons are:

* Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.

* People who default strategically and lose their houses appear to understand the consequences of what they’re doing. Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, said strategic defaulters “are clearly sophisticated,” based on the patterns of selective payments observable in their credit files. For example, they tend not to default on home equity lines of credit until after they bail out on their main mortgages, sometimes to draw down more cash on the equity line.

Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said, but they appear to look at it as a business decision: “Well, I’m $200,000 in the hole on my house, and yes, I’ll damage my credit,” he said of defaulters. But they see it as the most practical solution under the circumstances.

I don’t want to hear one conservative complaining about this. We are told incessantly that people should make such economic decisions. Indeed, much of modern economics has insisted that it’s rational decisions like this that make free markets efficient.

Is it moral to default on their financial obligations unless they have no choice? I’m sure that people wouldn’t have thought so once. But that hasn’t been the ethos of the past few decades, by a long shot. And in a world where there are banks being bailed out by the trillions and CEOs are paid salaries and bonuses in the millions despite their epic failures, it’s hard for me to see why the average “savvy” homeowner should be looked at askance for essentially doing the same thing. It’s the natural result of a culture that averts its eyes when the leaders of its financial sector game the system for their own profit. Everybody becomes a hustler.

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