Are You Teaching The Bank A Lesson, By Walking Away From Your Mortgage?

As a direct result of the recent mortgage crisis, there is a growing phenomenon. A growing number of troubled homeowners are deserting their homes. In many situations, the deserted home remains as a message to the lender. Homeowners often feel as though the bank/mortgage company took advantage of them with high interest rates & variable terms. The media has encouraged this notion by painting a picture of the mortgage crisis as a situation created by those greedy financial institutions. All the while, the popular public opinion has agreed.

However, few have played the devil’s advocate to this idea. There has not been a bold voice of reason, pointing to the role of personal responsibility as a key contributor. In a recent article, Megan McArdle has points out some of the logical flaws behind this popular notion of ‘sticking it to the bank’:

What signal does walking away from your mortgage send?  Maybe it says, “People are mad at banks and they shouldn’t charge such rapacious fees.”  On the other hand, maybe it says, “People have stopped feeling any responsibility to pay their debts, so you should make it harder to get a mortgage, and more punitive to walk away from one.”

The other problem with this notion is that tit-for-tat, and indeed every related strategy, requires that you can target the punishment at the bad actors.  But in many of the cases we’re disputing, there’s no evidence that the banks or investors who are getting shafted are the same banks or investors that are shafting others.  It’s like ripping off Korean grocers because a waiter at a sushi place once overcharged you.

If we think bankers are, say, being abusive with their overdraft fees, we have better ways to fix it than turning into a nation of deadbeats.  We could, umm, regulate their overdraft fees.  Or we could publicize the banks that charge outrageous fees, and try to do business only with the ones that pay better.  If banks made stupid loans, they’ll suffer by losing money.  But I find it hard to say that anyone is entitled to voluntarily default just to punish a bank for . . . being stupid enough to lend you money.  I mean, it’s sort of elegantly self-referential, but one cannot do it without indicting oneself right along with the bank.

But still, the answer is not to gratuitously walk away from mortgages.  Much of that paper isn’t held by banks, but by pension funds and similar institutions that did nothing to anyone.

At the end of the day, ‘sticking it to the bank’ doesn’t accomplish much. In fact, it hurts all the wrong people. Instead of playing the role of victim, maybe we should learn from the mortgage crisis. A few lessons come to mind. Namely, it is important for us to understand our financial actions. Blinding taking the suggestion of the sales person is a really bad plan. We’ve also learned that a well dressed profession in a bank, may be nothing more than a glorified used car salesman. They might not be trustworthy. So maybe we ought to educate ourselves. We don’t have to be mortgage experts, but we ought to know enough to avoid getting screwed.

If you really want to teach a bank a lesson, stop doing business with them. Do you have a shady creditor? Be a person of honor and stand behind your mistake. Don’t just walk…unless you absolutely have to. Be as honorable as you can in your circumstances. But don’t ever make that mistake again. And don’t ever do business with that institution again. Take that frustrated energy and use it as motivation.