Moral Hazard in Housing: How Do We Encourage Repayment When We Reward Default?

It’s all the rage now to run around talking about introducing moral hazard into the ranks of investment bankers, but what really bothers us is that no one talks about introducing moral hazard to the American homeowner! 

There was a time when there was a huge stigma to taking out a second mortgage.  There was a time when there was a huge stigma tied to filing bankruptcy.  Now it’s become just another financial planning tool.

Something else that really bothers us is how someone who lied on their loan application can still get their mortgage note modified.  A person who knowingly commits fraud by lying about their income and then gets their rate lowered to 2.00% for a few years?

Because of this, many feel their rescue should be:  “In return for our not prosecuting you for bank fraud, you agree to deed the property back to us, give us the keys and clear out in 72 hours....And by the way, you better leave it in really good condition or we will prosecute you.”

America was built by risk-takers, and you can’t have risk without potentially negative outcomes.  If America were to become a risk-free society, this would be a totally different country.   A risk-free society would not produce a Steve Jobs or a Bill Gates, it wouldn’t produce Google or a cure for polio.  It just wouldn’t be America. If homeowners (and big corporations) make bad decisions, shouldn't we let them suffer the consequences?

How do we encourage good behavior if we don’t stigmatize bad behavior?