Friday, September 17, 2010

Another Reason Economists are Not Like Normal People

The New York Times' Economix reports on the Rew Research Center's poll on the acceptability of walking away from a mortgage.  Amazingly, 59% of respondents say it is unacceptable behavior.

I am willing to bet that if you asked economists this question, a vast majority would say it is perfectly acceptable.  Why?  Well, a mortgage is simply a contract entered into by two willing parties, the terms of which are simple: the bank loans the money to the borrower and the house itself secures the loan.  This of course means that if the borrower fails to pay the loan the bank has the right to seize the house.  So there is not really any reason to consider borrowers who choose to opt out, based on the mutually agreed upon terms, engaging in unacceptable behavior.

The only argument I can see that economists might make is the externality walking away imposes on future borrowers: by contributing in some small way to the probability of default, you raise mortgage rates.  But with mortgage rates at historic lows, it is hard to worry about that too much.

How would you have answered this poll?


Allan said...


Fred Thompson said...

I agree, acceptable. In fact, a a few years back, my mom was talking about selling her house, which she owns free and clear. Since she also complains about lump sum property taxes, I suggested she take out a mortgage on the full value of the house. She would get her money, if the house dropped in value or didn't increase, she could just walk away, if and when she wanted to move. She thought the suggestion shameless.