Is Debt backed by collateral a Social Contract of Personal Responsibility to Pay Back?

If you give your word that you are going to pay somebody back that is lending you twenty.

"Hey Mike... I have no cash on me ... lend me $20 and I'll pay you back tomorrow."

That's personal responsibility. Mike lends you $20 and if you don't pay him back... guess what? He's not going to lend you $20 in the future. Your credit from Mike is pretty much cut off... Mike lent you money for nothing in return. His choice... Your basic social contract and personal responsibility was to pay him back based on your word.

Pretty simple concept... You agree?

Now... Let's say we ask Mike for $20 and in return... he gets your watch to hold on for collateral. You don't pay Mike ... he gets to keep your watch. You get pissed off because it's a "sentimental" watch or something along those lines and you want to take Mike to court, etc.. etc..

Well... you agreed to pay Mike back... or ... he got to keep your watch. Judge Judy would not hesitate to rule in favor of Mike and Mike is going to be able to keep that watch until you pay him back.

Not too complicated... is it?

So why does the whole housing thing have to be so complicated?

Money was borrowed to buy a home. Some bank leveraged the money they had on deposits and made that happen by lending the money with an agreement that if it was not paid back with interest, they get the home.

New home owner moves in and gets to enjoy a great home with terms involved that included paying back (with interest) somebody who lent the money. Let's say things go good.. the homeowners makes money... the economy is great and they move on to bigger and better things. They sell the home for more then what they paid, pay the mortgage off, take the profit and move on. SWEET deal... the lender does not even ask for a share of that profit made since it's not part of the deal made in the first place.

On the Flip Side...

Home Values tank and all of a sudden.... the home is worth FAR LESS then what is owed on it. The homeowner loses their Job or something else comes up that keeps them from being able to pay the terms agreed to. Should they be bogged down and haunted with the "It's the Personal Responsibility to Repay Debt" social mantra so they can bang their head into the wall even more?

Is there really a SOCIAL Contract of Personal RESPONSIBILITY on the deal? The lender made the decision to lend out $300,000 of leveraged cash with terms for the homeowner to pay much more then that back when interest is involved. If the homeowner can't pay it back on a property now worth $100,000.... they should MOVE ON.

Is There really a "Social Contract" involved that should make the homeowner feel Guilty about not paying the bank back on a home loan?

The "Social Contract of Personal Responsibility" thing added to the mix is Brain Washing. It's bad enough that a homeowner's financial future has been changed and things did not go as planned but the bottom line is that the Lender made the decision to lend the money backed with collateral.

It's really no different then going to a pawn shop and putting up something of value in exchange for cash. If the cash with interest is not paid back, the pawn shop gets to keep the item that was pawned. If the pawn shop made the decision to give more cash then the item was worth, it's their own fault.

Maybe the item pawned had sentimental value... if it means that much to the owner and they want to pay back more then it's worth, that's their own decision to make.

Does Anybody Really Feel Bad About a Pawn Shop losing money on a bad deal?

I don't know anybody that's going to feel bad about a pawn shop losing money on a bad deal. I certainly don't know anybody that is going to think that if somebody does not pay the pawn shop back for something that was put up for collateral, that there is a "Social Contract of Personal Responsibility" involved. And I certainly do not know anybody who thinks that taxpayer dollars should be used to bail out a Pawn Shop that made bad business decisions.

And in reality... people should have more sympathy for pawn shops then banks since pawn shop owners actually put up their own money.

When the whole "Personal Responsibility to Repay Debt" for something that was put up for collateral is thrown out of the equation, it should be much easier for people to make a decision based on what makes financial sense for them and to move on without the guilt. Guilt is a very powerful emotion to use against people and make them feel obligated to do something that they can't do and can make a bad situation even worse. Lenders certainly know this... just watch the "free" credit score commercials and how they characterize people with bad credit as the leaches of society. Fact of the matter is, FICO scores were developed for lenders... not for consumers.

When considering how all of the money was created out of thin air that blew up the real estate bubble in the first place, there should be absolutely no guilty emotions for a homeowner to move on and do what makes financial sense for them and vice verse.

I don't feel bad for the lenders making bad financial decisions in the first place. Did it really make financial sense to lend $300,000 for a home that only had a rental value of $1,300 a month?

Absolutely not... And on the flip side, it really did not make financial sense for a person to get involved in this deal either but that whole "It's Better to Own then Rent" thing is another powerful emotional tool that was used for people to get into something for the benefit of the people lending leveraged money and getting paid back with interest.

Get rid of the "guilt" emotions and let's all move on...

Paul Francis
Prudential Americana Group, REALTORS
Las Vegas Real Estate
702.592.3058