On his Fox News show the past couple of months, John Stossel has been taking what I consider a rather odd position: people who walk away from underwater mortgages are “freeloaders.” Back in March, he interviewed John Maddux, CEO of YouWalkAway.com, which helps people default on their mortgages when the amount they owe exceeds the current market value. He excoriated Maddux in the harshest terms, on the grounds that he was encouraging people to violate their moral obligation to honor their contracts. Maddux, apparently unprepared and blindsided, responded rather weakly.
Yesterday, May 16, Stossel had Maddux on for a rematch, in response to complaints that he’d treated him unfairly. Stossel opened with his old standby — honoring our contractual obligations. This time Maddux was ready, pointing out what those “contractual obligations” actually are. As he explained to Stossel, the seizure of collateral in the event of default is part of the written contract. But, said Stossel, the mortgage contract provides that the home-buyer will pay so much a month, on a certain date, etc., etc. Yes, said Maddux — and it also specifies that if the buyer defaults, the home will go back to the bank. That’s part of the contract, too.
Stossel, grudgingly conceding that maybe default wasn’t technically a violation of the contract after all, still wasn’t satisfied. It’s still morally shady. Defaulting makes mortgages cost a little more for other people! And it lowers property values in the neighborhood!
So other people’s right to high property values trumps my economic freedom? And I’m obligated to go beyond the contractual terms I agreed to in order to guarantee other people access to cheap mortgages? Where have we heard that sort of thing before? From people I wouldn’t normally expect Mr. Stossel to agree with. If anyone claimed a business owner was morally obligated to keep sinking money in a losing investment in order to keep people employed, for example, I expect Stossel would laugh them off his set. Someone who defaults an underwater mortgage, likewise, is simply putting a tourniquet on a money hemorrhage in full accordance with the terms of the mortgage contract — in exactly the same manner as anyone would walk away from any other losing investment.
I’m trying to imagine a case of a consumer being hurt by a large company adhering to the letter of its contractual rights, or of a corporation’s assertion of its full legal rights under the terms of a contract resulting in a greater cost or property value to consumers, in which Stossel’s sympathies would lie with the consumers. And frankly, I’m coming up with bubkes.
I’ve seen a similar reaction by some “libertarians” to the alleged “freeloading” of people who declare Chapter Seven bankruptcy on their credit card debts after a severe illness, divorce, or prolonged period of unemployment. Wrong. It’s not freeloading. On my authority as a libertarian, with an official secret decoder ring and everything, I give all of you permission to declare bankruptcy — without guilt — if some unforeseen catastrophe renders you unable to pay your bills.
You know that 18% or 20%, maybe even more, you’re paying in credit card interest? That’s a risk premium to insure the lender against the possibility of default, because it’s an unsecured loan. So you’ve been paying sky-high interest rates all this time precisely in order to compensate for the possibility you might walk away from the debt. If the state’s going to coerce you into repaying the debt under any and all circumstances, no matter what, shouldn’t the lender repay all that interest you’ve been shelling out against the possibility of default?
As market anarchist Lysander Spooner argued over a century ago, promises are unenforceable. When someone defaults on a debt because of unforeseen circumstances, their obligation extends to the means at their disposal there and then — and no more. It’s up to the lender to assess the borrower’s ability to repay before issuing the loan. Government attempts to change the terms after the fact, through so-called “bankruptcy reform,” are nothing but corporate welfare for the credit card industry.
I suspect Mr. Stossel would respond with derision, in most cases, to suggestions that individuals should refrain from exercising their economic rights in the general interest of “society.” But when banks enter the equation, apparently, all bets are off.