Strategic Defaults… Is this the culture we want?

Perhaps you’ve taken note of the cultural shift occurring in our country where the feeling of shame in some cases actually seems to be turning into a badge of honor. Remember the days when filing for bankruptcy was stigmatized in our society? Bankruptcy and default are no longer considered taboo, and this new way of thinking will have huge ramifications.

 In today’s economy, we’re seeing this type of behavior more so than ever before. Timely bill payment is becoming less of a priority, as there is less dependence on credit scores today. Some borrowers, who were able to pay, deliberately allowed their loans to go into default to take advantage of required “arbitration” which reduced required payments… The news program 60 Minutes even highlighted the ability and willingness of scores of borrowers to default on their mortgages.

 Personal responsibility for debt is being diminished by government intervention, which is disastrous for our economy. How will our society function if everyone assumes the debt contract they signed is basically meaningless? How will businesses function if the repayment of debt becomes optional? We are setting a bad example for future generations by shrugging off a late payment or by taking on debt without serious consideration as to whether it could be paid back.

 Government is partially responsible for this mentality by suggesting there will be “bailouts” for those who overreach and fail. This results in unfairness for those who try hard to keep their bills current. Essentially there is encouragement for borrowers who would normally honor their responsibilities to simply ignore bills, as they watch neighbors and friends take advantage of the “system.”

 If the government begins deciding who should pay back debt and who shouldn’t, we will likely see some severe unintended consequences, as we are seeing with the recent discussions on forcing banks to reduce principal amounts on loans to subprime borrowers. Banks will have no choice in this environment, but to constrain credit.

It cannot be expected that credit will flow easily if there is no intentional desire to pay it back. Banks make credit decisions based on the consumer’s ability and total responsibility to pay back the loan. With this new shift in a public that is shirking its responsibilities, banks need the ability to go after those who default, and there must be a more expedited process for banks to recover their assets. An 18 – 24 month foreclosure process, with a possible six to eight month extension because of a last-minute bankruptcy, does not help the system, and in my opinion actually hurts everyone by increasing the cost and desirability of lending.

Maybe we should ask ourselves – is this the culture we really want?

Leave a Reply