People are not corporations, and financial journalists are not ordin...

It is getting really old, the exasperation of entitled financial journalists that ordinary folks are not walking away from their underwater homes as much as they supposedly should. The latest to sound this tired refrain is James Surowiecki in The New Yorker (Living By Default, Dec. 19, 2011), who also makes the clichéd comparison to corporate decisions to shed debt using chapter 11 bankruptcy. He calls on underwater homeowners to do "the smart thing" by walking away.

According to Mitt Romney, “Corporations are people.” Whether or not you agree with that proposition, what is empirically true when it comes to debt is that people are not corporations. People don’t view walking away from debts that they can afford as a no brainer if it improves the bottom line. They agonize. They feel bad. They care about their homes and neighborhoods. Walking away is extremely painful, not a simple financial calculation. And, oh by the way, the further down you are in the 99 percent, the more likely that the financial calculation is negative, given impact on credit reputation from defaulting on a mortgage when your income is low. (On the other hand, many people worry about their credit reputations way after they have hit bottom and bankruptcy could actually improve their access to credit, more evidence that people don't take bankruptcy or any other form of walking away lightly.)

Of course, a lot more people are walking away these days, but not necessarily in the sense of “strategic default,” a phrase referring to those who can afford to pay. Rather, people are most often walking away because they can’t afford to pay. We don’t have decent remedies for the over-indebted to stay in their homes by paying their value, something that deserves attention before we worry about strategic defaulters, too.

“Moral hazard” has gotten a bad name from its cynical invocation by the mortgage industry, which created a Grand Canyon-sized pit of moral hazard by extreme risk-taking during the mortgage bubble (and subsequent bailout). Yet this industry dares to raise this concern about providing relief now that the bubble has burst, sweeping in even those who did not take risks but clearly cannot afford to pay their underwater mortgages in full now that the whirlwind not of their making has engulfed them.

If there were any seriousness about mortgage relief abroad in the land, we should already have had it in place two years ago, with Congress providing the ability to write down mortgages in bankruptcy. That approach would have addressed the risk of moral hazard, because debtors would have had to take the credit reputation hit of bankruptcy and also give up assets not covered by exemptions, if they had any.

So let’s stop the exhortations to the mortgage-afflicted to just walk away. I’d like to see someone who advocates this step publicly actually do it himself. Mr. Surowiecki, are you walking away on an underwater home you could afford to pay for and bragging about it, too? If not, maybe you should keep quiet about what others should do.

If we want mortgage relief to stabilize the housing market, there are lots of ways the government could accomplish that, given its control over of a vast number of troubled mortgages through its conservatorship of Fannie and Freddie. The Federal Housing Finance Agency could direct write-downs on underwater mortgages. But let’s not expect some uprising of ordinary folks who are underwater, and mostly feeling really bad about it, to lead us out of the current mess.