The Ethics of Mortgage Defaults

Matt Yglesias makes the case for guilt-free mortgage defaults:

My mortgage is an agreement I’ve made with Bank of America which is a publicly traded for-profit corporation. Companies like that, unlike people or people agencies or other kinds of institutions, don’t recognize any kind of goals other than monetary ones. Under the circumstances, any relationship you might have with Bank of America is a purely transactional, purely commercial one and if you treat it as anything other than that you’re being a sucker.

My local Wal-Mart has a number of consumer electronics items that I’d enjoy owning. And I’m a pretty smart guy; I’m pretty confident I could figure out how to sneak them out of the store without paying for them. Moreover, Wal-mart is among the nation’s worst abusers of eminent domain for private profit, which I regard as little better than legally-sanctioned theft. So in a sense, shoplifting gives Wal-Mart a taste of its own medicine.

Yet I’m not planning to shoplift from Wal-Mart. And the reason I won’t isn’t only, or even primarily, the relatively small risk that I’d get caught. Partly I don’t shoplift because that’s not how I was raised. And partly I don’t shoplift because I understand that a culture in which shoplifting was condoned by most people would be a poorer society. If shoplifting were widely condoned, retail establishments would spend more resources on security, and they would be forced to treat their customers with greater suspicion. I don’t want to live in that world, so I respect Wal-Mart’s property even when it’s not in my interest to do so, and even though I don’t personally like Wal-Mart very much.

In college, I had a friend who occasionally shoplifted. I wasn’t shy about voicing my disapproval of this practice, and I would have cut off friendship with him if he kept doing it. This anti-shoplifting norm benefits everyone. The stigma against shoplifting is a much more powerful, and less costly, check on the behavior than anything that happens in the formal legal system.

I think the same basic analysis applies to defaulting on a mortgage. Personally, I wouldn’t do it (unless I had no choice) because that’s not how I was raised. And I think it’s a good thing that defaulting on a mortgage carries a stigma. The existence of social pressures to pay mortgages has the same salutary effect on the mortgage market that the stigma of shoplifting has on the retail market: it relieves pressure on the formal legal system and allows businesses to be more trusting of their customers. I suspect that if everyone adopted Matt’s attitude toward mortgage defaults, interest rates would be higher and there would be more people who wouldn’t be able to get a mortgage at all, because they couldn’t scrape together a down payment.

Now maybe stealing is in a different moral category than promise-breaking. But if so, then advocates of guilt-free default need to articulate exactly what the difference is. I don’t see how it could turn on whether the harmed party is a “publicly traded for-profit corporation.” The long-run costs from both shoplifting and mortgage defaults are borne not just to shareholders but also to the broader society in the form of reduced public trust. I plan to pay my debts and pay for my purchases. If that makes me a “sucker,” so be it.