Mortgages, Law and Culture, or Why Plato Still Matters

You can get a lot of food for thought by reading the daily newspaper.

A case in point is today’s New York Times article about the “rich” defaulting on mortgages more than the “poor.” According to a firm that gathers this sort of data, over one in seven million-dollar-plus mortgages is in default, while only about one in twelve smaller loans is. That’s nearly a twofold increase in default rate as you cross the million-dollar line.

By itself, this factoid should not amaze us. It’s harder to pay large mortgages, and people who got them probably stretched farther to finance their McMansions. There’s also more profit in big loans, so unscrupulous mortgage brokers and banks probably worked harder and crookeder to produce them during the go-go subprime days. No big surprises there.

The surprises come as you probe beneath the surface of this story and read some of the 533 comments—a high number for the on-line Times. As several commenters noted, a million-dollar home is not “rich” in many areas of the country. In several I can name off the top of my head, a home with that price would be a rare bargain or a tear-down: Manhattan’s Upper East Side, L.A.’s Beverly Hills, Brentwood and Bell Air districts, San Francisco’s Presidio-Lake area, Los Altos, CA, and Greenwich, CT.

As a close friend once confided, a million dollars is not what it used to be. The take-away here is that our nation is in some respects no longer a single economy. What would buy a notable extravagance in most of the Midwest would at best get you a skimpy “starter” home in our wealthier areas.

The second surprise is how complex the governing law is, and how important it is to understanding what is really going on. Here the Times reporter was sloppy—an error several commenters tried to correct.

As I’ve outlined in another detailed post, state laws allow home-mortgage holders to walk away from “underwater” homes without recourse, but only in certain states. These laws, called “anti-deficiency” laws, require lenders to recover their loans only from the home’s value. Other states (“deficiency” states) allow lenders to recover any deficiency after foreclosure by suing the borrower. A borrower in a deficiency state can escape payment of the loan (if at all) only through bankruptcy.

There’s also another nuance. Many anti-deficiency laws, such as California’s, apply only to a principal residence, not to second homes or investment property. But as some commenters pointed out, clever owners of multiple residences can circumvent this rule by defaulting on their principal residence and moving into a second or investment home.

And so it goes. These complex rules favor the savvy and well-advised over the fearful and uneducated. Generally speaking, they favor the rich over the poor. They also amount to a state-residency “lottery” insofar as liability for deficiencies is concerned. If you live in a state that passed anti-deficiency legislation in the Great Depression, you win. If not, tough luck.

Like the reporter, most of the 533 commenters were unaware of these legal nuances. They focused on culture, not law. Many bewailed the loss of permanence and stability that home ownership is supposed to bring.

Down on your luck but lucky enough to live in a deficiency state? Then throw your home in the trash, hand the keys to the bank, abscond with whatever assets you can hide, and start over. Treat your home like those damnable plastic “clamshell” packages that thumb drives come in. Don’t give a second thought to the neighbors or neighborhood that you leave struggling behind you. Take care of yourself.

Hard on the heels of the moralists and communitarians were the self-justifiers. Corporations and even small businesses dump bad deals every day, they said. There’s nothing wrong with that. Contracts are made to be broken; they specify in nauseating detail exactly what the results of default will be. So when you default deliberately, you are doing nothing more than exercising your “rights” under the contract.

One commenter went so far as to explain that the first thing law students learn about contracts is that breach is lawful and routine. He’s right. Legal economists even have a fancy theory to justify deliberate default, which goes by the name of “efficient breach.” There are no criminal penalties or punitive damages for breaking a contract, and debtor’s prison vanished with the Victorian Age. So the defaulters and self-justifiers have all the law on their side.

But that’s law, not culture. What’s the effect on culture—our society—of a rule of law that encourages home throw-aways, promotes complexity and nuance, favors the rich and the tricky, and encourages “efficient breach”? You can answer that question with a single factoid: of all the 533 commenters, only one plaintively longed for the day when a person’s word was his bond.

Why is that significant? If you like economic analysis, you can point to efficiency. It takes time, money and expensive lawyers to draft all those detailed contracts. Human language is uncertain, so persistent parties can always dispute what the complex clauses mean. Then you go to court, wait years for a decision and pay lawyers hundreds of thousands or millions to duke it out. That’s efficient?

But leave economics aside for a moment. Let’s talk about trust. It has an economic component, to be sure. But it’s also a human emotion. When you can trust your neighbors and the folks you deal with to treat you fairly and honestly, your step is a lighter and your outlook brighter. You have more time and mental energy for creativity, initiative and fun. You aren’t spending lots of time planning and plotting, and drafting all those clauses, just to avoid being cheated or to gain the upper hand.

Japan provides an interesting contrast. It has fewer than one-hundredth the lawyers per capita that we do. Yet, with less than one-half our population, it also has the world’s third-largest economy. When things go awry between Japanese corporations, executives sit down and try to work things out. They rarely go to court, except when dealing with westerners.

And one other thing. When you visit Japan, be sure to stop at a stationery store and ask the proprietor what those little brightly-colored envelopes with fringe on them are for. As he/she will tell you, they’re for sending cash gifts, in crisp new 10,000-yen notes (the equivalent of $100 bills) through the mail, so postal employees and everyone else will take special care of them.

That’s trust. Maybe it’s also why Asia is on the rise and we are in decline. Maybe some aspects of Asia’s culture provide efficient social guarantees that beat our ten thousand words of legalese which only lawyers understand.

It seems self-evident that a culture requiring fine print drafted by lawyers is not one based on trust, community and common values. Maybe that’s why health-insurance reform disgusted so many voters, and why the financial-sector reform to come seems ready to do the same. It’s not that reform wasn’t needed; it surely was. And it’s not that the reform bills don’t reflect lots of good ideas.

But what the public wanted was a simple rule that says “Treat us fairly. Don’t swindle us. Give us health insurance and financial products that meet our reasonable expectations, don’t trick us, and actually work.” Instead, they got thousands of pages of legal prose that leave enormous room for dispute, and that not even expert legal reporters can adequately explain. After being burned so many times, the American people suspect there are loopholes in those thousands of pages that will cost them dearly and come back to bite them when they can least defend themselves.

And they’re probably right. We now live in a culture of “gotcha!,” where the cleverest finagler, not the most honest and helpful person, nearly always wins. Goldman Sachs is just the latest exemplar but hardly the first.

Which brings me to Plato (and Socrates, too). During the runup to the 2008 campaign, I published a post about “virtue,” mostly praising Obama and likewise McCain (before his wretched presidential campaign).

“Virtue,” is a vague word denoting human qualities that make a person admirable and build a just and admirable society. The ancient Greeks—the world’s first recorded small-d democrats—worried about it more than almost anything else. To them, law was secondary; being worthy of trust and building community were first.

Greek punishments told the tale. There was far more ostracism than death. The greatest crime was harming the community, and the punishment (exile) was appropriate to that end.

My “virtue” post met with a resounding silence, apparently out of tune with the times. One commenter on another blog, who seemed to like my support of Obama, said my talk of “virtue” put him off his feed, or words to that effect. I realized then that we live in a culture that doesn’t know or care what “virtue” means. Maybe we should. Maybe we should all read Plato again.

As health-insurance reform shows and financial reform soon will, law can change literally overnight. In our country, that happens when the President signs a bill passed by Congress into law. But culture takes decades or centuries to change.

If you want an example, look at our “original sin,” slavery. We ratified our Fourteenth Amendment in 1868. It reads in part as follows:

“All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

Pretty clear and comprehensive, isn’t it? It’s hard to mistake its meaning or intent. Yet we had Ku Klux Klan terror and/or Jim Crow laws for 96 years, until the Civil Rights Act of 1964. Since then we’ve elected an African-American president, but many who share his black African genes still suffer from discrimination, disrespect, poverty and marginalization. And it’s now 142 years after we adopted the Fourteenth Amendment and 145 after the guns fell silent in our bloodiest-ever war, waged to make its adoption possible.

Watching culture change is like watching trees grow. That’s why it’s so dangerous when culture changes for the worse.

When I was born in the mid-forties, we still had a culture in which “his word is his bond” was a mark of admiration. Now, thirty years after Reagan, we have a culture of “Gotcha!” and caveat emptor, in everything from health care to banking and computers.

I don’t trust any single health insurer to give me a fair, trustworthy policy, so I have three. I don’t trust banks to deal with me fairly, so I split my assets among a half-dozen financial institutions, each of which I’m ready to abandon at the drop of a hat, as I already have at least four in the past. I don’t trust computers, software, or electronic devices to work consistently, or their makers to stand behind them when they inevitably fail, so I practice redundancy in my every use of modern technology. I always have a backup, often two.

Maybe these are necessary self-protective measures. But a culture in which a superbly educated retired person has to spend so much time and money on self-protection is a sick one. As many of those commenters on the mortgage defaulters so vividly expressed, it is a culture of every man or woman for herself.

Our nation wasn’t like this when I was a kid. Everyone seemed to have a basic sense of reason and fairness—a common language of virtue, as it were. Today it’s all about what you can get away with: what lies and spin politicians can get people to believe, and what fine print business can sneak by consumers and business partners in contracts.

Usually I’m a cockeyed optimist. But as I ponder these lessons of culture, I get less and less so. Law is powerless against decaying culture: reform bills may change some laws for the better, but all they do culturally is increase the volume of fine print. It’s unclear whether any recovery from such deep cultural rot is possible, which may be why Rome fell.

But three things are increasingly clear to me. First, in the long run, a society of “Gotcha!” will never surpass a society of trust like Japan’s, where you can send large packets of cash through the mail in perfect confidence. Second, laws alone will not cure what ails us. We need a change of culture and a change of heart. Third, repairing our culture of “Gotcha!”, selfishness and greed is going to take a long time.

I doubt I’ll be around to see the change, although I expect to live to see China surpass us in GDP. Whether we can cure our cultural rot in time to prevent an exodus of talent and arrest our economic decline depends a lot on how soon we start.


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