Falling home prices have lead to a surge of strategic defaulters, in real estate columnist Kenneth Harney’s words:  people who abruptly choose to stop making mortgage payments.  These folks have made an economic decision that continuing to pay on a house that is significantly underwater does not make economic sense.

Harney is clearly bothered by this choice by people who appear to be able to make the payments, but elect instead to default and lose the property.  In this and an earlier column, he raises the question of the morality of  elective mortgage default.

I’ve been chewing on that idea:  is there a moral issue when a borrower voluntarily defaults?  The law attaches  consequences to certain promises, such as the promise to repay money borrowed.  If the borrower is capable of repaying but does not, is that a moral failing?  Or is it nothing more than the weighing of the consequences of shunning a legal duty vs. the cost of performing the promise?

I tried thinking about this from the lender’s side of the transaction:  are there any moral obligations that the lender assumes when they make the loan?  Could the lender exercise a legal right (to foreclose, say) and yet violate a moral precept?  (All of this presupposes that corporations have morals, or moral duties, of course.)  Would a lender have a moral obligation to modify a loan in the absence of a legal obligation?

Or, is all that is involved in the mortgage loan transaction the undertaking to expose yourself to certain unpleasant consequences if you default?

It bears more thought.  I routinely ask bankruptcy clients whether it makes sense to continue to pay on mortgages where the loan balance is significantly greater than the property’s value.  I want them to consider the option of walking away in the course of the bankruptcy.

Quick:  how is a small Tennessee town like a California family facing foreclosure?  The New York Times suggests it’s because they were both sold risky financial products to meet their borrowing needs.  The unemployment-wracked town of 11,000 was not told about the interest rate risk in the bond derivatives that financial advisors promoted and sold the town.  The interest payments on the town’s bond debt have quadrupled.

That’s essentially the same story I hear from clients with adjustable rate, pick a payment loans on their homes.  The financial professionals advising them talked only about the immediate consequences of the loan, and downplayed the risks.  Over and over, clients tell me that when they questioned the broker about how they were going to make the full principal and interest payment, they were assured the broker would get them a better loan before any damage was done.

Why is it that politicians opposing mortgage modification in bankruptcy want to demonize the unsophisticated borrower without regard to the supposed professionals who sold and profited from these exotic financial products?  Are we going to hear that the city council of Lewisburg, Tennesee bought more sewers for the town than they could afford?

When are we going to put our energies into a solution to the foreclosure crisis, rather than finding a scapegoat?

The bankruptcy mortgage modification provision, headed to the Senate this week, is a bargain to taxpayers next to the “voluntary” mortgage modification programs instituted by the administration.

HR 1106 involves no taxpayer money;  it strips the special interest provision sheltering banks from  home loan modification.  The costs of changing the mortgage so that the debtor pays the current value of the collateral and the lender is spared the costs of foreclosing are borne by the borrower and lender.

The modification and refinance programs introduced by the adminstration involve taxpayer  cash subsidies to servicers and borrowers who successfully renegotiate a mortgage.

Why is it that the opposition to judicial mortgage modification claim that the honest and responsible are paying the mortgage for the greedy and irresponsible?

American Express is offering a cash reward for card holders who cancel their accounts.  This is touted as a convenience to help card holders manage their finances.  Huh?

Is it my imagination, or weren’t credit card companies recently promoting the use of their cards as a means of conveniently managing money?

Old Am Ex Blue, we hardly knew ye…

We’ve poured money into the nation’s banks, and no amount of money seems to be sufficient to restart the flow of credit through the economy.  Our leaders, our newspapers, and our populace all feel we’ve been shorted.  What did the banks do with the money if they didn’t lend it out?

If you were the chairman of the board of a bank, looking around at the employment situation and the prospects for the economy getting worse, would you be anxious to bet on a borrower begin able to repay a loan?   What is the borrower’s house worth, today?  What’s it likely to be worth tomorrow?  What are the chances a business will prosper?

Frustrated as I am about the situation, objectively I can’t blame the banks for not lending now.  (Now, if you want to talk about what they lent over the past three years, then there’s plenty to talk about.)

The US tax code is stuffed with tax breaks to further some social policy or another.  We’ve made it safer for legislators to funnel money to the poor, the parents of college aspirants, those saving for retirement by giving them a tax break than by appropriating money for the purpose deemed worthwhile.

And these are the consumer breaks.  The business tax breaks, to favor one industry or behavior or another, are more prevalent and more complex still.

Kathy Kristof’s article today points out that the tax code has become so complex that most people hire others to prepare their returns and those professionally prepared returns are full of errors!

The national expenditure of talent and money to navigate the tax code is not a rational use of bright people.  Tom Friedman pointed out last week the waste of talent commited by Wall Street developing exotic financial instruments rather than genuinely useful products.

As an electorate, let’s become brave enough to make our policy choices upfront, and not disguised as a matter of taxation.  Consider what the nation could do with the energy and intellect of  accountants and lawyers liberated from tax issues as a result.

My newest colleague at Bankruptcy Law Network, David Leibowitz, summarized my view of bankruptcy law in the new year :

• Project calm
• Work hard to hone my skills
• Share what I learn
• Stay healthy since it will be a long haul

My hopes are that hard times will reset our personal and societal values, so that “things” and personal consumption will recede in importance in favor of family, friends, and community.

Perhaps we come to understand that the things that taxes buy us are, by and large, positives:  better schools, roads without potholes, bridges that don’t collapse, decent care for the unfortunate.

Maybe even we come to value living below our means and taking responsibility for retirement.

Since my magic wand is out for servicing this  week, maybe it’s enough to hope for clients who will come organized and prepared to help me help them.

I’ve spent the last three days at the annual meeting of the National Association of Chapter 13 Trustees in San Francisco. Strewn through the convention site are banners thanking those who have contributed money to put on the gathering of Chapter 13 trustees. Those three sponsors at this event are exclusively big creditors and lawfirms who represent them.

The parties in interest in a Chapter 13 form a triangle: trustee, debtor, creditors. The trustee has obligations to both of the other parties. Debtors come in onesies and twosies. Creditors tend to be national and big money players. There is no organization of bankruptcy debtors; there is an organization of debtor’s attorneys, the National Association of Consumer Bankruptcy Attorneys. By the nature of the practices of its members, NACBA is not a big money player.
At the gatherings of debtor’s lawyers, the usual sponsors are those who want to sell something to the attendees. It’s not the opposing parties.

I don’t think that Chapter 13 trustees can be “bought” by free breakfast and afternoon snacks. But just like influence of lobbyist money on politicians, this feels uncomfortable to me as a debtor’s lawyer.

More on education efforts by the Chapter 13 Trustees.

It was a good day at my desk, if one has to work on Saturdays.

• I gave notice that one client was rescinding a $180,000 mortgage for Truth in Lending violations.
• I found three clients whose second deeds of trust can be eliminated as liens on homes because they are completely underwater.
• I sent out three Qualified Written Requests under RESPA to lenders whom I suspect have played games with the servicing on my client’s mortgages.

My conclusion about the mortgage meltdown is that there is not one universal approach to getting clients some breathing room on their mortgage debt, but there are a number of approaches that can lessen the pain borrowers are feeling, and raise the odds these people can keep their homes.

A bankruptcy court in Oakland recently rebuffed a mortgage lender who claimed it had been defrauded by borrowers who lied on the loan application. The judge agreed the debtors falsely inflated their income, but found that the lender had not reasonably relied on the false representations. The lies were not enough to make the debt non dischargeable when the lender was asleep at the switch.

The broader question in the mortgage meltdown is whether the Wall Street firms that bought these liar loans from the sleeping lenders have any recourse against the lender. Can the seller of the loan escape responsibility for selling a financial instrument of questionable value? Did the Wall Street buyer have to investigate the actual bona fides of the loans or is it entitled to rely on the lender’s representation that the loan was sound?

Street smarts suggest that Wall Street was content not to look too closely at these loans so it could pretend that all of this profitable paper was what it was puffed up to be. Under the theory of the Hill case, they, too, may be found not to have been reasonable in their reliance.