Does Paying Your Mortgage Make You a Good Person, or a Stupid Person?

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If your home is underwater—meaning you owe more on your mortgage than the property is now worth—simply walking away may make the most business sense. Considering the ongoing foreclosure mess, it would seem easier than ever to just stop paying the mortgage and enjoy what amounts to “free rent” until the lenders get their paperwork in order. Regardless, many homeowners continue to pay their mortgages because 1) they love their homes and don’t want to ever lose them; 2) they believe the real estate market will rebound and their homes won’t be underwater for long; or 3) they think that paying the mortgage is the right thing to do. But when it comes to business, is there right and wrong? And perhaps more importantly, what happens if every underwater homeowner stops paying the mortgage and milks the situation for all it is worth? Is that situation “good” for anyone?

More and more, when the question of whether strategic default is OK, ethically speaking, comes up, it seems like Americans consider walking away to be acceptable, or not all that bad. About a year ago, when an University of Arizona professor recommended walking away as the most sensible approach for millions of homeowners, it seemed somewhat outrageous. Now, a recent Pew Research survey says that 36% of Americans consider walking away to be acceptable under certain circumstances.

Rather than bothering to explain why it is that so many homeowners have stopped paying their mortgages in the past couple of years, a WSJ columnist instead wonders why so many distressed homeowners continue to pay their mortgages. Why aren’t more people defaulting? The arguments for default, strategic or otherwise, are easier and easier to make in today’s amoral business environment:

We live, alas, in a world, and an economy, which rewards ruthless self-interest and penalizes “morality.” Just look at the big banks.

A mortgage isn’t a blood oath, it’s a business contract—a collateralized loan. It isn’t simply a promise to repay the lender. It’s a promise to repay the lender or to forfeit the home. Isn’t someone simply fulfilling their contract by handing over the keys when asked?

While the economy remains in the doldrums, and while new stories continue to pop up regarding shady big business tactics, this kind of logic increasingly makes sense.

But while it’s fairly easy to rationalize walking away, there are consequences—obviously for the individual’s credit score and for the lender eating the loss, but also for the business atmosphere at large. If people make it a habit of walking away from their obligations, whatever trust there was among buyers, borrowers, and sellers erodes further and further.

“If bankers don’t trust that people will pay off their loans,” a a story from the Chicago Trib’s Gail MarksJarvis explains, “banks will demand higher interest and other assurances before lending in the future.” Continuing:

In fact, there’s research behind the concern, says Tom Donaldson, a University of Pennsylvania Wharton business ethics professor. And it shows that both bankers and borrowers are at risk if trust erodes.

“We’ve known for decades that trust is critical to successful business,” said Donaldson. “Studies have shown that if one party cheats on one end, the other party feels more entitled to cheat. It’s not the most noble way, but it is human nature and it becomes a race to the bottom.”

Unfortunately, we can’t trust people to do the right thing—if for no other reason than in today’s business world, it is not clear what words like right and wrong and good and bad actually mean.