Friday, December 11, 2009

Walk Away

Yesterday's edition of The Wall Street Journal had a front page story below the fold that was titled "American Dream 2". The article was about how some people have walked away from home ownership when mortgage balances exceeded home values. Some are now renting, sometimes larger houses with rent lower than their previous mortgage payment. This is understandable and, in itself, not that surprising.

One part of the story was particularly troubling. It mentioned people who just stop paying their mortgage, putting their money into vacations, etc. Is that ethical? The availability of funds that otherwise would be paid for housing is allowing them to spend on other things. But the losses to the banks may have to be picked up by the taxpayer. Is there an institutional basis for what they are doing? Do the existing rules in our society (both formal laws and informal beliefs) provide a basis for understanding this behavior?

Some may argue that the banks, mortgage brokers, and others were not ethical in placing them in homes they may not have been able to afford. But does one justify the other? This story has some excellent possibilities for use in economic analysis and maybe even an exam question. Give it a look.

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