The Joy of Foreclosure?

If you can't afford to make your mortgage payment because you've lost your job, or it has ballooned beyond what you can afford, then foreclosure might be your only option. That's understandable. Although some people might complain that such borrowers should have had better foresight, it's hard to blame them for defaulting, since it is really their only option. But an article in the New York Times today oddly celebrates foreclosure. It explains the wonderful life that awaits those who default on their homes. This sends the wrong message.

Here's the beginning, which captures the tone for the entire piece:

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life -- something they did not want but are in no hurry to get out of.

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

"Instead of the house dragging us down, it's become a life raft," said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. "It's really been a blessing."

Isn't foreclosure great? It can buy you a steak dinner, an airboat ride, and even leave you with a little money for gambling. Ahhh, the American Dream.

This article looks an awful lot like another that appeared in the Times almost exactly a year ago about defaulting on credit card balances. That one explained how great it was to refuse to pay your credit card, since many companies will just settle on a lower amount you owe. Unsurprisingly, the author is the same.

So is the point both articles miss: this is only great for a time. Once the foreclosure hits your credit score, you had better have cash to pay for future steak dinners and airboat rides, since you may not be able to get a credit card going forward now that your credit is ruined. And if you do, the higher fees you'll be paying due to your associated risk will leave you with little money left to gamble away at the casino.

Of course, for many Americans, the prospect of not having to pay a mortgage that exceeds the value of their home far outweighs a tarnish to their credit. And the article notes this:

"We could pay the mortgage company way more than the house is worth and starve to death," said Mr. Pemberton, 43. "Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing."

So the "self-preservation thing" banks will have to do in the years to come is be stricter about credit. And that might be okay. After all, credit was over-extended -- that's what led to the crisis. A little less credit is probably positive in the long-run.

But consumers developing a nonchalant attitude towards default isn't. The moment our credit culture goes from a grudging acceptance of some strategic foreclosures to celebrating default, everything changes. If underwriters can't assume that borrowers will want to pay back their loans if they can, then they'll not just tighten, but choke consumer credit. And glorifying foreclosure the way this article does leads us down that dangerous path.