{"id":6496,"date":"2010-01-11T14:15:15","date_gmt":"2010-01-11T19:15:15","guid":{"rendered":"http:\/\/www.patheos.com\/community\/jesuscreed\/2010\/01\/11\/strategic-defaulting-on-loans-what-do-you-think\/"},"modified":"2010-01-11T14:15:15","modified_gmt":"2010-01-11T19:15:15","slug":"strategic-defaulting-on-loans-what-do-you-think","status":"publish","type":"post","link":"https:\/\/www.patheos.com\/blogs\/jesuscreed\/2010\/01\/11\/strategic-defaulting-on-loans-what-do-you-think\/","title":{"rendered":"“Strategic Defaulting” on Loans: What do you think?"},"content":{"rendered":"\n<\/head>

We don\u2019t often enter into the business side of life or discuss loans and mortgages and foreclosures and bankruptcy, but this article \u2014 HT: RJS \u2014 suggests to me that there is something to be discussed here and we need some financial folks to speak up. The issue is that many people today are \u201cstrategically\u201d deciding to default on their loans; they are \u201cshrewdly deciding\u201d that defaulting and going belly up will help their financial situation. What do you think? Is this wrong? Or this is just shrewd?\u00a0<\/p>\n

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So, here\u2019s a clip from a recent article in the NYTimes<\/a><\/b><\/i>:\n
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And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven\u2019t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default \u201cscare stories\u201d and, indeed, should encourage borrowers to default when it\u2019s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a \u201cpowerful moral constraint\u201d while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of\u00a0loan modifications<\/a>\u00a0\u2014 the very goal the Treasury has been pursuing to end the crisis.<\/p>\n

No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.<\/p>\n

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We don\u2019t often enter into the business side of life or discuss loans and mortgages and foreclosures and bankruptcy, but this article \u2014 HT: RJS \u2014 suggests to me that there is something to be discussed here and we need some financial folks to speak up. 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