Talk Of Liberty

Recently John Stossel aired a special show about freeloaders.  Now, I am a huge fan of Stossel and consider myself a fellow Libertarian as well.  During his segment he brought up the freeloaders who take advantage of the program www.youwalkaway.com where individuals strategically default.  Stossel calls this “immoral” and calls those doing it “freeloaders”.  Normally I agree with John, however he has gone back to his liberal ways worrying about the greater good and moral obligations to society.

Lets consider what obligations a home owner has, morally.  When a mortgage is signed, it is a contract.  Now to a libertarian, a contract is sacred and crucial to property rights.  By agreeing to a contract, two parties agree to terms.  Now consider a home mortgage contract, basically the buyer of the home agrees to paying back the loan or risk damaging his/her credit and potentially having a deficiency judgment placed against them in the event of defaulting.  They also agree that if they default, there is a formal process that will be adhered to and eventually they will vacate the property.  Nowhere in this agreement, is there any place that says “you have a moral obligation to pay as a debt slave for life” nor does the contract state “you must pay in order to keep the neighborhoods value from falling”.

Stossel notes that there is a moral claim on society to be a debt slave and to pay a mortgage regardless of how poor of an investment it could be.  This is liberal hogwash.  A home owner is only expected to do what is morally best for themselves and their family.  Ayn Rand would never expect a home owner who has lost 150k in a losing bet, to not walk away.  Why would an individual not have a greater moral obligation to their best interest, not societies?  A real libertarian view would be to look at this as any other business decision and a SWOT (Strength Weakness Opportunities Threats) analysis would be done. Consider if a business opened a new location, purchasing the land and building a property.  If it threatened to be a very bad long term investment, wouldn’t the business simply analyze the situation and make a smart decision?

The moral hazard in this situation is the Lender and Investor.  Lets consider a scenario; assume we have an investor who is willing to give $1,000 dollars to a lender.   The investor must perform the due diligence to ensure the investment they are making matches the return they expect.  Now the lender is responsible for making a loan that meets the investors guidelines.  They must morally make an honest loan that meets the investors criteria.  So then finally we have a borrower, who must meet the criteria of the investor who will be risking their capital.

So finally, let’s assume the investor says, “you can lend my $1,000 dollars to anyone you want, I am unconcerned about my investment”.  So the lender finds a borrower, who just so happens to be highly addicted to crack.  The lender warns this “highly addicted to crack” individual that if they do not repay this loan, their credit will be negatively impacted.  The lender also agrees to lend the entire $1,000 dollars at a very low interest rate of 6%.  Even better is the investor agrees to this term in addition to the crack user and the lender both agreeing.  So not much time goes by and the crack user defaults.  Is this a shock?  No; we expected it.  This should never happen in the real world, but is an example that helps to support my conclusion, where the real “moral” hazard is found.

The problem with the scenario above is that the investor did not perform the due dilegence.  In a free market driven society that would never happen.  Investors would never risk so much money on very risky loans.  The real moral problem however, is that investor is the US taxpayer.  However, this “true” investor has no say in the risk level.  It is Fannie Mae and Freddy Mac as well as other federal loan programs that determine the risk tolerance they will purchase.  They have a moral obligation to defend the investors assets.  The real problem here is that those agencies are quasi government agencies.  The investor that funds them is the taxpayer who have no choice but to say “yes” to it’s terms of lending.  A GSE can simply demand more from taxpayers and the Federal Reserve, never worrying about the quality of the investment or borrower because it is not their money at risk.

In conclusion, homeowners walking away represent a completely logical approach.  Rather than being a debt slave for life, they choose a wise business decision to cut their losses and follow the contract for which they agreed.  Sorry John, I love your work and would work for you in a heartbeat, but I think you missed this one by a bit.