btw, Permission was given by the author to copy the piece.
Increasingly, I see references to the ethical considerations with respect to defaulting on a home purchase loan as a response to declining home values. In a few words, there are no ethical considerations with respect to defaulting on a home purchase loan as a response to declining values in jurisdictions where explicit "non-recourse" laws are on the books.
In various jurisdictions, California being one of them, the lawmakers thought about it for a while and came to the conclusion that the multi-way negotiation between a home buyer, home seller, real estate broker, and mortgage lender was not a negotiation between parties of equal sophistication in financial matters, and that there was risk that the home buyer would be taken advantage of by the other parties, who were (accurately) thought to have greater knowledge, experience, and resources, in most cases.
The lawmakers then wrote laws which said, in effect, that the home buyer had rights which could not be signed away, because they are protections of the law, superior to any words in the contract. The "non-recourse" laws hold that a lender who makes a loan to a home buyer, the entire proceeds of which are used exclusively for the acquisition of the home, bears the entire burden of insuring that the home-as-collateral has a true value that protects the lenders interest in the event of default by the borrower.
The clear intent of such laws is to expect the lender to have good knowledge of property values and to require down payments and/or mortgage insurance in a proper combination to adequately protect themselves in the event of borrower default. Substantial down payments are clearly the best case, creating the greatest incentive for the borrower to hold up his end of the bargain.
If a wealthy person, or a retirement/investment fund, or a foreign country turns money over to a lender to make home-purchase loans in non-recourse jurisdictions, they inherit the burden of protecting themselves, by insuring that the lenders are lending on a sound basis.
NON-RECOURSE LAWS ARE NOT IN THE CATEGORY OF LOOPHOLES OR UNINTENDED CONSEQUENCES. They are clear statements by lawmakers that lenders are responsible for their own welfare as to property valuations, and that home buyers will have some government-provided protection against overpaying due to the actions of more influential market participants.
The story plays out, with the investors, lenders, and government participants trying to figure out how to prevent home prices from receding to their natural levels. Perhaps government will figure out some action to stall further declines, allowing inflation to (eventually) establish a natural equilibrium, no longer requiring government intervention. Or perhaps home prices will continue declining. I predict the latter.
But don't try to make the owner-occupant-borrower the villain in this story. The non-recourse laws were clear instructions to lenders (and to investors supplying lenders with funds) to keep lending on a rational basis - instructions that went unheeded. Upside-down owner-occupant-borrowers have an option that was intentionally provided to them as a countermeasure to the actions of others (who were the ones acting unethically).