How the Mortgage Crisis Made Us Immoral

If you own a house and I’m your neighbor, I’ll respect your property rights. It’s just the right thing to do. (Though if there’s a fire at my place, I might break in to borrow your fire extinguisher).

If you live in a nice neighborhood, you have little to fear from the more modest parts of town. (Though if your neighborhood doubles its average income, and the modest part of town doubles its unemployment rate, and you start putting gates around your community—well, you might be a little more fearful).

Which leads us to this US headline from Fannie Mae’s Quarter 1 National Housing Survey:

“Nearly twice as many Underwater Borrowers (27%) think it is okay to walk away from a mortgage if they face financial distress than in January 2010.”

Is this a moral issue? What does it mean that the frequency of the opinion has changed? That it has doubled in a year?

Economics and Morality

Most people still think it’s immoral to walk away from a debt. But those who think otherwise—that defaulting on a payment to a nameless morass of long-since-tranched, securitized asset-owners is as amoral as it gets—have grown by 100% in just over a year.

That’s pretty high growth for the amoral team.

It’s one thing to say that morality should have nothing to do with economics. And indeed, the sense of honor and justice and trust that underpins most moral behavior is socially useful. If we all acted solely in our immediate self-interest in every situation, the world would be a greedy, dangerous, Hobbesian mess.

At the same time, economic disparity writ large spells social unrest. In Greece, they riot in the streets. In Rio de Janeiro, they have a street crime problem.

In the US, we are witnessing a small version of things. People who used to feel a moral obligation to repay a debt are saying to themselves, “Heck, the big guys and companies do this all the time—if things aren’t working out, they just default, take the insurance payment, write it off, whatever. There’s nothing moral or immoral about it—it’s just dumb to do otherwise.”

Economics Can Wear Down Morality

You may think that honoring your debt is a moral issue. You may think it’s not. What’s clear, though, is that the ratio of those two views is being driven by economic changes.

The credit ratings services will take note of this, calling it a likely increase in the default rate, and a cause for downgrading securities.

But the people on the street—in both the nice and the modest neighborhoods—will experience it as a moral casualty of the economy.

It’s just one more area of human relations that will no longer be governed by the rules of “rightness,” but rather by the least common denominator, Darwinian terms of the marketplace.

And that’s not a change to be happy about.