Sunday, February 7, 2010

Another Option for Main Street Homeowners: The Strategic Default

Reecon Advisors released a national survey indicating nearly one out of ten homeowners, 9.2% or 7.4 million, would likely choose to default if their homes were worth less than what they owed on their mortgages. It has become increasingly evident that some people are beginning to do just that--they are choosing to walk away from homes by “strategically defaulting” when paying off such loans no longer makes economic sense.

Remarkably, many borrowers are still reluctant to choose this option out of a sense of moral obligation, even as lenders are all too happy to ride high on a tidal wave of bonuses subsidized by the income taxes of those very same borrowers. Any moral scruple on the part of borrowers is illusory, and is certainly a product of the propaganda machines of our government subsidized, Big Finance cartels on Wall Street.

Indeed, some of the greatest minds in our legal system have long considered contractual obligations (which include mortgage obligations) to be beyond the realm of morality—beyond good and evil, so to speak. In some circumstances, a breach of contract is economically desirable because it engages the self-correcting mechanisms of the free market. One of the more visible adherents of the “efficient breach theory” is the acclaimed Judge Richard Posner. Posner finds justification for the “efficient breach theory” is the traditional common law rule that a breach of contract cannot be remedied by punitive damages and penal damages. In other words our legal system does not punish people for breach of contract, it only seeks to make aggrieved parties whole by restoring the status quo. Punishing people for breach of contract is undesirable for our society, because it would discourage the “efficient breach”, and therefore economically efficient behavior. Posner explains his views in his majority opinion in Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir. 1985).

Further reading: Should You Consider a 'Strategic Default' on Your Mortgage?

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