Whistling the Underwater Mortgage Blues

Recently Patch asked, "" This is a great question and one that gets to the root of the housing bubble: GREED. You might as well ask, "Is it morally wrong to steal from a thief?"

When I began my professional career as a banker in 1982, banks were highly respected pillars of the community. Commercial Banks and Savings and Loans claimed a moral, or more precisely, a fiduciary responsibility as a capital resource and financial guardian for their constituents. They were widely viewed as quasi-public institutions.

There was no such thing as too big to fail as banks were precluded under Glass-Steagall from expanding beyond state borders. They were closely regulated with strict capital and due diligence requirements. These banks operated on thin profit margins and were hardly viewed as cash cows. They survived by charging fees for services (imagine that) and narrow interest rate spreads.

This all began to change in the mid 80s with a rash of deregulation allowing banks to grow into regional, and then national monstrosities. They became more and more disconnected from the stake holders in their communities and discarded the notion of fiduciary responsibility for an "anything goes" mindset. Many banks began publicly trading their shares for the first time which lead to an unquenchable thirst for profit.

Indeed much of what ails our country today comes out of this "profit over people" corporate culture that pervades all of our national institutions. The conditions were absolutely ripe for the exploitation of the housing market. The Savings and Loan crisis of the late 80s and early 90s was the first clue that things were headed in the wrong direction. It was also a proving ground for how easy it was for banks, builders, Realtors, appraisers and mortgage originators to collude in manipulating  the real estate market. The one sure thing they told us was that real estate values would always go up up up. They would see to that.

These actors, led by the banks, made obscene profits from this scheme which they had perfected by the late 90s. As a banker I specialized in troubled assets and loan restructures, presiding over many bankruptcies and foreclosures, so I have first hand knowledge of what sound lending practices look like. While it's true that some lending requirements had been eased under both Clinton and Bush with their administrations desire to push home ownership, that was not the root of the problem. Neither was the Community Reinvestment Act which was enacted much earlier. The problem was the willingness of mortgage lenders to skirt what rules remained. In short, they fudged the numbers to make sure that loans that shouldn't have been made were.

When I remarried, my wife and I bought a home in 2003. By this time I was out of banking. I was appalled at how easy it was for us to get a low interest, zero down loan. Our mortgage originator wanted us to buy a much more expensive house and was pushing us towards an ARM. I felt like I was dealing with a used car salesman. It was a hard sell. Fortunately I knew better, but many didn't and were sold homes they couldn't afford under terms that were destined to end in default. These unsuspecting buyers were bilked out of thousands of dollars in origination fees and sold homes that were artificially overvalued. Should they have known better? Perhaps, but they were still caught in a con. The banks failed in their fiduciary responsibility to insure these loans were sound.

So no, under those circumstances it's not morally wrong to walk away from an underwater mortgage. In fact my advice would be skip away, whistling a happy tune, content in the knowledge that you're at least getting out with your dignity intact. While I'm at it, if you haven't already moved your money from your mega bank to a local credit union or community bank, you really should. If the feds refuse to bust the big banks we still have the power to do it with our feet.

Read more from Brian at ... And The Horse They Rode In On.