Walk Away

Walk Away: The Rise and Fall of the Home-Ownership Myth is a monograph written by Ludwig von Mises Institute President Doug French in which he makes the case that it is not unethical or un-libertarian for an underwater homeowner to strategically default.

Introduction
In the introduction, French posits that the American dream and civic religion of the 20th century centered around home ownership. The obsession with home ownership was largely the result of government programs and subsidies. Among the arguments proffered by the government and home-ownership advocates was that a mortgage was the best possible investment one could make due to perpetually increasing home values. French also notes that the government viewed home ownership as a kind of jobs program in a post-WWII economy in which women were to be "employed" as home makers rather than competing with returning veterans in the job market.

The bursting of the housing bubble in 2007-2008 seriously undercut the ubiquitous belief that home values could never decrease. French writes that the drastic decline in home values, despite government interventions, caused many Americans to view both their homes and its contents very differently. According to French, for the first time in nearly a century, people began to resent their homes and copious possessions because these things tied them down and prevented them from being able to accept better employment employment opportunities in other parts of the country or world.

French observes that young people are recapturing the "pioneer spirit" of early American history and trading their homes and possessions for greater mobility and economic opportunity. Digital technology, French believes, "has made it possible to do untraditional jobs while living anywhere, and perhaps changing one's location every year or two." The disillusionment with housing and the realization that the higher-order good does not possess magical properties caused many Americans to realize that continuing to pay more for their houses than they are worth is not a prudent.

French concludes his introduction with the assertion that, despite the official rhetoric of politicians, there is no ethical objection to the practice of strategic default. He contents that "It is an extension of economic rationality."

Chapter one: What is Strategic Default?
"Strategic default is when homeowners stop paying on their mortgages when, in fact, they can afford to make payments, but choose not to because the house that serves as collateral for the loan is worth considerably less than the loan balance."

French writes that in 2010, nearly 1/3 of foreclosures were strategic defaults and that many academics believe that the historical stigma associated with defaulting is being eroded. He relays a hypothetical example, based on real data for the Salinas, California housing market, in which it would take around 60 years for a homeowner to recover their equity.

French writes that in many of the regions in which the housing market was hottest during the boom, between 70-80% of homeowners were estimated to owe more than their home was worth in 2010. Additionally, predictions for 2011 put nearly half of all American homeowners(25 million)"under water." The time the foreclosure process takes varies by state from months to several years. French believes that the estimate that 6 million homes await foreclosure, in addition to the 7 million already seized by lenders may be conservative. The estimated 6 million homes awaiting foreclosure is small relative to the estimated 11-15 million homes with negative equity.

French explains that the government has a vested interest in the American housing market and has been manipulating it since President Hoover's "Own Your Own Home" initiative which began before the Great Depression. "Owner-occupied housing not only provides employment, but each homeowner has a stake in their community and their country. An ownership society is a compliant society. those with an ownership stake recognize the need for the kind of security that big government can provide. Homeowners have something to protect and look to government to provide that protection. And a big mortgage that takes 30 years to retire keeps the family focused on what's important-paying for their American dream. there's no time to be concerned with the size of government, there are house payments to make."

"Nothing makes a suburban American family sleep better at night than knowing that the military is fighting the bad guys on foreign soil to protect their happy hoe while their hobs are made secure by wise economists at the Federal Reserve who are making all the right interest rate moves. And the more local cops on the beat keeping an eye on the neighborhood, the better."

French notes that many libertarians view strategic default as a breach of ethics and contractual obligation. He reminds readers that mortgages contain no provision for borrowers to return the home securing the note just because the home's value falls below the amount of money borrowed. Similarly, the lender has no claim on any profit a borrower might make if the home sells for more than the amount borrowed. "The borrower and lender aren't partners"

French then reminds readers that "The laws of economics have leveled the government's 90-year housing agenda and individuals should not be demonized for obeying those laws."

Chapter Two: Double Standard
Research indicates that homeowners are refraining from strategically defaulting because they wish to avoid feelings of shame associated with foreclosure and because they tend to overestimate the consequences associated with foreclosure. The notion that strategically defaulting on ones home is a shameful act has been encouraged and reinforced by the government. Former Treasury Secretary Hank Paulson said "any homeowner who can afford his mortgage payments but chooses to walk away from an underwater property is simply a speculator-and one who is not honoring his obligation." The C.E.O of the Mortgage Bankers Association warned homeowners to consider the message that defaulting would send to "their family and their kids and their friends."

Though the government has been urging individuals to act against their financial well being and continue to make their mortgage payments even if they are underwater, big banks and commercial property owners are actively engaging in strategic defaults. Morgan Stanley strategically defaulted on 5 office buildings it unwisely purchased for $2.43 billion at the height of the bubble. The Morgan Stanley spokeswoman said "This ins't a default or foreclosure situation, we are going to give them the properties to get out of the loan obligation." Similarly, Taubman Centers, Inc., strategically defaulted on a $135 million mortgage after the securing properties value fell to $52 million.

Corporate executives have a fiduciary obligation to act in the best interest of their shareholders, not their lenders. By strategically defaulting, managers are fulfilling their obligation. These corporations, some of which received government bailout money, are held to a different standard by the government than are individual citizens who are underwater and are paying taxes to bailout the banks.

Links

 * Introduction
 * Introduction


 * Articles, essays and reviews


 * Other media
 * Authors Forum: Walk Away - The Rise and Fall of the Home-Ownership Myth lecture by Doug French, March 2011