Americans renewing cavalier attitudes about debt

By DAVID MOON, Moon Capital Management, LLC
January 3, 2010


As we begin 2010, it is refreshing to note that all is back to normal. The Dow Jones Industrial Average increased more than 20 percent last year, consumer spending was up during Christmas, Minnesota elected another nut to statewide office and, as evidenced by the 60-39 Senate vote on the healthcare bill, the Washington form of bi-partisanship is alive and well.

And Americans have renewed their cavalier attitudes about debt and personal responsibility.

Recent articles by MSN, AOL and two by the Wall Street Journal describe a newly popular technique that Americans are using to improve their standard of living. They are walking away from their mortgages.

These aren’t people who were tricked by evil mortgage brokers into borrowing more money than they could afford. These are homeowners who have the income to continue to meet their mortgage obligations, but have found that they can rent nicer homes for the same or less than their monthly house payments.

In Palmdale, California, Timothy and Shana Richey were able to rent what the Wall Street Journal described as a luxurious home with a pool after voluntarily defaulting on their mortgage. “It’s a better life,” Mrs. Richey explains of their decision to walk away from a house on which they owed about $230,000 more than it was worth. “It really is.”

The Richeys were able to use some of their newfound wealth to buy season tickets to Disneyland and take a Mexican cruise.

The Richeys, who also own two rental properties, were approved for a loan modification under the new Making Home Affordable program. They declined the offer, deciding instead to stiff Wells Fargo for the $430,000 mortgage.

Wells Fargo received $25 billion in TARP funds, along with a federal guarantee on $9.5 billion worth of its debt.

Perhaps the Richeys determined 2009 was the year of Jubilee when, according to some interpretations of the book of Leviticus, people enjoy a year of universal pardon, including the cancellation of all debts.

Until Congress and a number of U.S. courts began unilaterally amending mortgage agreements in 2009, I was certain that our legal system didn’t recognize Jubilee, but perhaps I was wrong.

In a way, there is some long-term positive economic impact from these walk-aways. Housing prices in many markets had clearly reached unsustainable bubble levels, as had real estate lending.

Home loans no long resemble anything like those offered by Jimmy Stewart’s George Bailey at the Bailey Building and Loan Association. Mortgages are combined into pools, and then split into derivative securities owned by investors around the world. This securitization frees up capital for all sorts of other uses, including business investment.

Business lending likely won’t return to robust levels until the securitization markets normalize. That won’t happen until lenders and funders believe asset prices have declined enough to eliminate most of the market risk from new real estate loans.

And for that to happen, the market must be allowed to work, including bankruptcies and foreclosures.

As long as home prices are propped up by artificial means, the securitization markets won’t recover. Real estate prices need to decline. Lenders who made stupid loans need to suffer. So do those borrowers.

There’s just a part of me that wishes they wouldn’t enjoy it so much.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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