With all the news lately about people “walking away” from their mortgages, increasing bankruptcies, and debt consolidation/repayment schemes, I got to thinking about what the obligations of the buyer are. And, also, the ways that we as a society have made it easy to sidestep those obligations.
Obligations
What are our obligations when we buy something? Does buying a pack of gum carry different obligations than buying a house? Naturally, we have obligations to ourselves as to the upkeep and use of that which we buy. If I buy a house, I have an obligation to myself to do what I can to make that house last as long as possible and remain structurally sound. If I buy a pack of gum, it’s a lesser commitment, but that obligation still exists as an obligation to not let my purchase go to waste and either chew the gum or give it to someone to chew.
What obligations to we have to the seller when we buy something? There are two ways to look at this. The first scenario involves paying cash for something. If the full purchase price that was negotiated is satisfied, I don’t believe you have any obligation to the seller. However, if the purchase involves debt of some sort, there are obligations that arise. If you purchase with a credit card, there is an obligation to pay that debt to the credit card company. The same is true for a mortgage, a car, and even a pack of gum. Not only do you have an obligation to pay the debt, but you also have another obligation to yourself to learn what that debt is going to cost you. This last obligation is the one that was most ignored during the fiasco that we like to call a housing bubble. Many ignored the facts of what their new houses were going to cost and bought them anyways.
Sidesteps
In the pursuit of a consumerist society, these obligations can sometimes get in the way. If I ignored the obligation to know the cost of debt and bought a house anyways, I likely entered into an agreement to pay a mortgage company a set amount each month. Recently, it’s become popularized to demonize the banks that lent the money to people as the sole problem and, as a result, it’s become no big deal to merely “walk away” (default, or stop paying) on a mortgage. The reasoning follows that it’s better to default on the mortgage than remain paying on a house that is worth less than what the purchase price was, or that has had payments adjusted higher.
In the same way, the obligation to pay credit card bills, auto loans, and most other consumer debt has been sidestepped. It’s no longer a social stigma to declare bankruptcy. Many, knowing they are about to file for bankruptcy, will go out and max out their credit lines in anticipation of the bankruptcy cleaning the slate.
As these sidesteps become more and more common, the social stigma will decrease even further. If everybody is doing it, it’s hard to demonize something. You might demonize your friend. Or relative.
Of course, this isn’t to say that defaulting on a mortgage should never happen. Or that bankruptcy should never be declared. It happens. It’s the rampant social acceptance of these situations that is troubling. What happens when it becomes commonplace for mortgage borrowers to default? The loans become more expensive. The banks have to cover their costs to repossess the house, the staff to service the loan, and associated costs with trying to resell the house. Where is that money going to come from? They aren’t going to just pay it out of the kindness of their hearts. They’ll pass it on to the customer. Suddenly, mortgages will become even more front loaded with fees and interest. When bankruptcies become more commonplace, credit availability is going to decrease. We’ve already seen that recently. People who could easily get a credit card before will be denied.
All of this is all the more reason to avoid debt whenever possible. If society isn’t going to do it, hold yourself to your obligations as a buyer. Obligate yourself to paying off your debt. Then, obligate yourself to paying in cash from then on.
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The part about people maxing out their credit cards before declaring bankruptcy reminds me of a story I just heard that was a little disturbing.
A friend of a friend was living in Miami before the downtown condo bubble burst.
He bought a condo before the burst for around $250,000, then the market dropped, and identical condos in the same building were selling for $125,000, so he bought 2 more while his credit was still good, and then foreclosed on the first condo to let the bank absorb the loss, and now he rents out the other 2 condos for profit.
I don’t know the full details, but that was the gist of it.
My friend told me this as if it was a smart business decision, which I suppose it is in some sense, but he doesn’t see it as forsaking his responsibilities or as a shady way of doing business.
It just seems to me like taking advantage of the system, and in the end, you’re hurting real people, not just an unnamable corporation, I mean, the banks have to lay people off when they lose too much money I would guess.
I understand in desperation, yeah, stop paying your debt before you stop feeding your children, but using it to your advantage is another story.
Thanks for the article, very interesting.
@Max
That’s an interesting spin on it. I hadn’t thought of using the same concept that way. I guess you’ve got to give it to him for creative thinking, but, yeah, not so much on the holding up your side of your obligations. Eventually, if enough people do similar things, the banks do lay off people. If we just take a look at what happened with JP Morgan or Bear Stearns, I think that proves itself. But there are a ton of smaller banks and lenders who closed about the same time and let all of their people go.
I think that’s a great example of exactly what I’m talking about too.
Thanks!
I agree completely! When we decide to make a purchase, we have to follow through until it is paid in full. Having the ability to pay in cash is best, but even in borrowing we have an obligation to the creditor!