HINDSIGHT, THEY SAY, IS 20/20. So, in retrospect, it is not so surprising that the boom in real estate prices of just a few years ago was followed by a painful collapse.

Encouraged by low interest rates and a willingness of banks to lend money to almost anybody, many people had jumped into the housing market, sometimes buying expensive homes with mortgages they could barely afford, based on the belief, celebrated in televisions shows like “Flip This House,” that housing prices would continue to go up and up and up. But the law of gravity applies to housing prices, too, it seems.

Inevitably, the housing market cooled down, and housing prices stopped rising; then they slowly reversed direction and began steadily declining. As a result, many people found themselves making mortgage payments on homes worth far less than what they had originally paid for them. Moreover, many of them had been talked into taking mortgages they didn’t really understand, for example, mortgages with adjustable rates or with special “balloon” payments due after a few years, or that were too expensive for them to afford in the first place. The financial crisis of 2008 and the recession that followed only made things worse. Faced with monthly payments they could no longer sustain, these borrowers lost their homes through foreclosure.
Widespread foreclosures, in turn, drove housing prices even lower, leaving more and more homeowners—by 2010 an estimated 5.4 million of them—
“under water,” that is, with mortgage balances at least 20 percent higher than the value of their homes.
Consider thirty-year-old software engineer, Derek Figg.
He paid $340,000 for a home in the Phoenix suburbs. Two years later, its value had dropped to less than $230,000, but he still owed the bank $318,000. As a result, Figg decided to stop paying his mortgage, defaulted on his loan, and walked away from his home. Or consider Benjamin Koellmann. He paid $215,000 for an apartment in Miami Beach, which three years later was worth only $90,000. Although still paying his mortgage, he is thinking about following Figg’s example.
What distinguishes Figg and Koellmann from many other homeowners whose homes are under water or who are in mortgage trouble is that both have good jobs and could afford to keep making their monthly payments—if they chose to. Moreover, they are smart guys and knew what they were doing, or thought they did, when they bought their homes.
However, figuring that it would take years for their properties to regain their original value and that renting would be cheaper, they are among a growing number of homeowners who have either walked away from their mortgages or are considering it, not out of necessity, but because doing so is in their financial interest. Experts call this “strategic default.”
Or, in the words of an old Paul Simon song, “Just drop off the key, Lee, and get yourself free.”
As any financial advisor will tell you, there are lots of good reasons not to default on a mortgage. A foreclosure ruins a consumer’s credit record for seven years, and with a low credit score, one must pay a higher......

Discussion Questions 1. What would you do if you were in Figg’s or Koellmann’s situation? What factors would you consider?
2. Do people have a moral obligation to repay money that they borrow, as Professor Brenkert thinks, or is this simply a business decision based on self-interest alone, as Professor White thinks?
3. “It is morally permissible for homeowners whose homes are under water to default on their mortgages even if they could continue to pay them.” What arguments do you see in favor of this proposition? What arguments do you see against it?
4. When it comes to paying your debts, does it matter whether you borrow money from a bank or from an individual person? Explain why or why not.
5. Suppose your moral principles imply that you should keep on paying your mortgage, but financial self-interest counsels you to walk away. How are you to decide what to do?
6. Repaying a loan is a legal obligation. Is it also a moral obligation? Explain why or why not.
7. Are the banks responsible for the housing boom that enticed people to buy homes at inflated prices? If so, does this affect whether you have an obligation to repay your loan? What about Professor White’s contention that the banks themselves care only about maximizing profit?