The New Morality

Honor thy lender.

    The lending industry as a whole quickly evolved to rely on products and tactics designed to generate late payments and severe indebtedness.  Lender success was predicated on borrower failures.  These practices became standard, finding their way to customers with good credit ratings.
  While a low credit score meant astronomical interest rates, a high credit score was an invitation for lenders to extend ever larger credit lines with little regard for ability to pay.  Most of these customers  got better interest rates and frequent flier miles, but they were extended far too much credit.  Lenders weren’t concerned about when these balances were paid off.  Quite the contrary.  They were much more satisfied with a stream of perpetual payments.  Even better if the payments were late once in awhile, or if the accounts exceeded their credit limits.⁸ 
    As these practices  became more and more common, it was not at all unusual for the lending system to be described as “predatory.”  There have been countless articles, books, television newscasts, and blogs devoted to the subject.  Lenders have been perceived to be intentionally putting their customers in untenable financial situations for some time.  Yet despite the general sense that lenders routinely act in an unethical manner, when debtors run into trouble, it’s the debtors’ character, not lenders’, that is most frequently called into question.  When a lender responds to a distressed debtor by jacking up interest rates and otherwise increasing an already crippling burden, it’s the debtor who is berated for not being able to keep up.
    
 Pay Unto Caesar
    The first thing most overextended borrowers are greeted with is the threat of “ruining your credit.”  Collection agents, financial columnists, and a motley assortment of financial “gurus” who seemed to materialize from thin air constantly warned us to fear bad credit and to make any sacrifice needed to make timely payments to preserve our credit scores.⁹  Whether or not making these payments was harmful to families‘ ability to provide for themselves was irrelevant.   We were told to get second, or even third jobs if that’s what it took.  The credit score was the most important consideration.  The message was “Make your payments or else!”¹⁰ 
    And just in case the threat of financial doom wasn’t enough, debt problems were cast as character flaws.  When it came to public discussions, debts were referred to as “obligations.”  Paying your debts, no matter how unreasonable the cost, was always the right thing to do.   Those with debt problems and low credit scores weren’t the victims of job loss, health problems, bad advice, poor decision-making, lack of business savvy, or predatory lenders.  They were “deadbeats,” “irresponsible,” and “dishonest.”  Those who sought relief from onerous terms and conditions so that they could pay off their debts within a lifetime were referred to credit “counselors,” as if debt problems required some form of therapy.  Your credit score was now your personal morality meter.
      
 Our "Representatives"
    Nonetheless, in the early 2000‘s personal bankruptcies began to rise.  They increased at a rather modest pace considering the scale of risky lending, but the pace wasn’t nearly modest enough for the lenders.  They made sure bankruptcy “reform” was a priority for Congress, and Congress responded with gusto.
    In 2005, the same year MBNA reported reduced revenues because too many customers paid by their due dates, members of both houses of Congress wailed about “irresponsible” debtors and flat-out lied, claiming that these “deadbeats”  were costing everyone else $400 each year in extra interest costs by “abusing” the bankruptcy courts for personal gain.¹¹  Too many people were “getting away” with shirking their obligations, and so forth.  The long-established legal right to escape unpayable debt was cast as something akin to bank robbery.  Those seeking bankruptcy protections were a shameful burden on society.  In the end, the law was changed to such an extent that credit card payments were given priority over child support payments in any dispersal of funds overseen by the bankruptcy courts.  Shameful indeed.
    It’s important to note that while the bankruptcy law was tightened for ordinary debtors, many loopholes enjoyed by the wealthy and the corporate sector were preserved.  One example is particularly relevant to today’s mortgage debacle.  Those with secondary homes (i.e. summer and vacation homes) could have their mortgage balances modified through a Chapter 13 bankruptcy proceeding, but primary residences, homes that are lived in full-time, were not eligible for such treatment.  A congressional effort to rectify this disparity was defeated in 2009.
    
 Save The Children!
    Recently there have been reports of homeowners walking away from their mortgages because they owe much more than their house is worth.  In economic terms, this is a logical decision to avoid throwing good money after bad. Yet this kind of “act in my economic self-interest like a true capitalist” decision-making has been portrayed as somehow immoral or even a bad example for our children.  A recent New York Times article reported that John Courson, president and C.E.O. of the “liar” loan-creating Mortgage Banking Association, 

“ . . .told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.”  

    If we are to take Mr. Courson at his word, we should feel badly about not allowing ourselves to be bled dry by lenders that issued unpayable loans.  Fraudulently labeling risky loans as “investment grade” securities is somehow ethically acceptable, but giving up the family home in a last-ditch effort to avoid total ruin sends the wrong “message” to our children.  If Mr. Courson ever paid for an ethics class, he should ask for a refund.
    The same Times article quoted former Treasury Secretary Henry Paulson, who also happens to be the former C.E.O. of Goldman Sachs, as saying  

“any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.”¹² 

    Paulson made this statement with no sense of irony.  He seemed to forget that Goldman’s own reckless speculation created the housing bubble that led directly to homeowners walking away.  Being a “speculator” is fine for investment banks, but it’s an epithet for individuals.  
    The idea that debts are moral obligations for individuals, that we MUST pay up no matter how badly we’ve been abused or mislead, or how truly broke we are, has become something close to conventional wisdom.  However, this standard, like Paulson's view of "speculators," does not to apply to corporations.  A large real estate developer recently walked away from a $5.4 billion mortgage when the value of one of its properties fell to $1.8 billion, and an AP report summed the situation up as thus:

    Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can't pay its mortgage. That's good business.

    Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he'll be a deadbeat.

    Those two borrowers face the same financial dilemma: Their mortgages far exceed the values of their properties. Yet one gets to walk away without guilt, while the other can't.¹³

         
Twisting Our Values
 The value systems we adhere to when amongst our families, friends, neighbors, and co-workers are very different from lenders' values.  This is to be expected since families and individuals have different goals and incentives than lenders do.  Our problems arise when the two value systems collide. "Family values" like "trust," "honesty," and "fairness" are often defined as things consumers owe to lenders rather than the other way around.  This is how a single mother struggling with 30% interest rates and $70 in monthly fees becomes a "deadbeat."  It's "dishonest" or "unfair" for her to miss payments, regardless of the interest and fees.
  The astonishing irony of it of it all is that today's lending system is based on dishonest, immoral behavior.  Every day, pay day lenders charge 400% interest to poor people left behind by the banking system.  Every day, bill collectors threaten debtors with jail. Every day, car dealers increase their customers' car loan interest rates for a commission, and tell the customers that "this was the best rate the bank would give me."  Every day, credit card companies jack up interest rates on thousands of grandmothers.
    The lending system treats people in ways we would never treat each other as individuals, yet we buy into its morality story.  We call each other "deadbeats" and whisper behind the backs of our foreclosed neighbors. We gain a sense of "responsibility" and self-worth by sending our money to lenders month after month, year after year, never quite realizing we've been had.  The ability to make payments is not a moral virtue, yet we treat it as just such a thing.  Our societal morals have been usurped by corporate morals.