Walking away....from Values

As Values Slide, More Weigh Walking Away From Mortgages - NYTimes.com: "...The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance. They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages..."

This article describes mortgage holders who have either walked away or are considering walking away from their mortgages. A few points are worth considering.

1. Perhaps no one with a mortgage should be called a homeowner if the bank "owns" the house. Quite a few comments on the NYT article suggested that the mortgage holders (MH) should walk away because the bank took the risk and the house belongs to the bank. However, the technicality is that the house is purchased by the owner, and the bank only has a lien on it. So the mortgage holder takes the risk for the value of the property- the bank takes a risk on the ability of the mortgage holder to pay the amount. Hence ethical values suggest that a mortgage holder, if capable of paying the monthly amount of the mortgage, should pay irrespective of the value of the house. That is the contract the mortgage holder agreed to.
2. Any effort by the government to fund a bail-out of the MH that is piled on the tax payers creates Moral Hazards. More importantly, it saddles everyone with the burden of paying for the mistakes of the MH and the banks. Since the banks made lots of money selling and trading these mortgages, why not force the management of the banks to write down all these loans to the current value of the properties? When the shareholders take a bath perhaps the management of the banks would start cleaning their brains.