2009 is the year of the strategic default. The Wall Street Journal has several articles this month on homeowners walking away from hefty mortgages even though they can afford to pay. (This article from James Hagerty and Nick Timiraos is a good place to start). And the Journal's online map of strategic defaults from 2004-2008 is a good tool for seeing just where people are using this "financial strategy": (click here to us the interactive version):
Earlier this month, The Atlantic's Megan McArdle wrote about her disdain for people who can pay but don't:
I am afraid that I am one of those people who have no patience for people who refuse to pay their debts. People who can't pay their debts? All the sympathy in the world, even if they accumulated those debts through a series of stupid decisions. Easy bankruptcy is a good thing precisely because it helps us sort out those sorts of situations quickly, allowing the unhappy bankruptee to get a fresh start. Yes, some of them go on to make even more stupid decisions. But most people who declare bankruptcy do so only once, which means they don't make that sort of mistake--or at least, that magnitude of mistake--again.
It is hard to argue on moral grounds that people should live up to their promises. But Daniel Gross cautions in his MoneyBox column at Slate that homeowners who walk away from their fiscal responsibility are just following the lead of America's financial leaders:
Strategic defaults are the American way, and I'm not talking about strapped middle-class borrowers who prefer spending money on vacations to staying current on their payments. Deep-pocketed companies, billionaires, and institutions that can afford to stay current on payments strategically default all the time.
Morgan Stanley, for example, is a gigantic corporation. As of the second quarter, it boasted total capital of $213.2 billion. It certainly has the ability to make good on obligations incurred by its many operating units. But earlier this month Morgan Stanley said it would turn over five San Francisco office buildings to lenders rather than pay the debt on them. Why? Morgan Stanley foolishly paid top dollar for the buildings in 2007, when prices were really high. The values have plummeted, and tenants are hard to come by. "This isn't a default or foreclosure situation," spokeswoman Alyson Barnes told Bloomberg News. "We are going to give them the properties to get out of the loan obligation." Smells like a strategic default to me.
This makes for an interesting debate. Read McArdle's post here. And Gross's post here.