Why Banks Try to Make Borrowers Feel Like Sinners When They Can't Pay off Their Mortgages

More than three years into one of the worst housing crashes in economic history, Americans remain wedded to a dysfunctional ideology that leaves citizens perpetually at the mercy of predatory bankers. Even after witnessing a gigantic wave of abusive lending drown the life savings of millions, most citizens still believe that borrowers, not bankers, are to blame for unaffordable loans, while a staggering majority believes it is morally wrong for troubled borrowers to walk away from their mortgages—even amid conditions of financial distress.

These figures and plenty of other distressing data come from a little-noticed survey published in April by mortgage giant Freddie Mac (in addition to serving as bonus factories for reckless executives, Freddie and its sister company Fannie Mae produce some of the most reliable housing data available, particularly on consumer sentiments). The reason for the survey's relatively small splash is easy to understand—almost nothing about consumer attitudes toward housing has changed since 2003, right before the eruption of the subprime boom.

Let's start with the worst news—blame for bad loans. Despite all of the stories proliferated about fraud (80 percent of which is committed by lenders, according to the FBI) and other forms of banker abuse, a full 53 percent of Americans believe that borrowers are responsible for taking out unaffordable loans, not the lenders who push the loans. This simply does not make sense. Let's imagine the best-case scenario for the lender, in which both the borrower and the lender have an educated, sober view of housing options, and nobody is being defrauded. This view is essentially presented by J.P. Morgan Chase Chief Economist James Glassman in a recent note to clients:

Folks may like to hear that someone else is to blame for the mistakes they made, but everyone knows--including those who bought houses far beyond what they could afford and then walked . . . that Wall Street isn't the only culprit in the housing debacle. 

Glassman's best defense of the banks is, in essence, that it takes two to tango. But unlike the borrower, the banker is supposed to be a professional—it's the banker's job to make sure that he isn't extending loans that cannot be repaid, and he gets paid very well to exercise this judgment. Personal responsibility is all well and good, but it's absurd to argue that it only extends to one party in a transaction—especially the party who isn't getting paid.

This belief that personal responsibility does not extend to bankers creates an unfair and irrational moral burden on borrowers who find themselves in over their heads. A full 80 percent of the general population believes that it is not acceptable for a borrower to stop paying his or her mortgage, even under conditions of financial distress. Even more astonishing, 61 percent of borrowers who have already missed payments on their mortgage believe the same thing.

Bankers intentionally propagate this insane ideology in order to profit from it. That's why high-ranking people like Glassman publish "research notes" castigating his bank's own customers. The Wall Street bonus machine feeds on irrational borrower guilt. If you're stuck in a mortgage you can't afford, refusing to pay is your only real defense against that machine.

Buying a home is usually not a very good investment. According to economist Dean Baker, co-Director of the Center for Economic Policy and Research, it costs about 15 percent more to buy a home than it does to rent it. That extra 15 percent is a direct gift to the banks at the expense of consumers. It means that homeowners are getting a lousy return even when house prices are not plummeting thanks to Wall Street excess.