Monday, May 03, 2010

How Much Does Society Owe to People Who Don't Pay Their Debts?

Without defending the cockamamie system of determining credit scores (in which even a default and foreclosure can end up dinging your credit history only a little bit more than a late payment on a store credit card), one thing needs to be clear: The purpose of a credit report is not to decide whether your problems are your own fault or whether you're a good person. It's to give lenders a sense of the probability that if they lend you money, you will pay it back according to the terms you agreed to before God, country and family. The loan modification's federal imprimatur does not change the fact that you are getting away with not honoring the terms of your agreement.

Leave aside that preventing a proven bad borrower from going further into debt is probably the best thing you can do for that person. Exactly how "fair" is it to the vast majority of borrowers, who make their payments on time and on the money, to allow bad borrowers to make consequence-free changes to their mortgages? The credit consequence of deadbeating is already minor considering the gravity of a mortgage default. Debt forgiven under a loan mod is already going untaxed. Hundreds of thousands of mortgage scofflaws are already enjoying years of payment-free living just because banks don't want to foreclose. Should there be no penalty at all for going bad on a loan?

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