Broke is the New Rich

I just got off the phone with a friend of mine who told me about his deadbeat aunt who was just offered a mortgage modification from her bank. Let me set this up: this is a woman who hasn't made a payment on her mortgage in 18 months. She lives in a rat rap of a home which she bought with no money down, refinanced to take cash out for other bills she wasn't paying, and is in debt as deep as she ever was.

The bank offered her a new mortgage with a rate of 4.000% and no costs to her at all. The kicker is she is considering it. She wants even better terms, as if one could imagine better terms than an offer to stay in your home at below-market rates. This is a travesty.

Yesterday, a group of bankers testified in Congress about the success and failure of private lending initiatives to modify loans and avoid foreclosures. It turns out that even when borrowers are offered more lenient terms (and by lenient, we are talking about the deal I just mentioned), the borrowers end up back in default within a matter of months.

Is this surprising? Why pay your mortgage when you can go into default and extract better terms later. What is the cost to you to do that? Seems like a pretty good deal to me.

Back in the old days, before the turn of the century (I am talking about the 20th Century), people were expected to pay their bills. It was shameful and embarrassing to be tagged as a deadbeat dad, a check bouncer or a tax evader. Similarly, if you were to default on your home, you would suffer the ultimate set of public humiliations: foreclosure, tax sale or eviction.

Today, there seems to be no shame in mortgage default or foreclosure. Television news features hapless homeowners telling the story of the new deal they got by modifying their loan. Conversations overheard at restaurants center more around how to get out of paying one's debts, rather than how to make money investing in real estate. These are the same people, motivated by greed when the market was going up, who now, motivated by greed still, try to profit from the market downturn.

Government intervention will not help people who don't pay their bills. Nor will it prevent greed from ruining the system again. People need to pay their bills. Let's start promoting responsibility and thrift, rather than rewarding bad behavior.