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

One regular feature in media coverage of the mortgage loan modification process is people who either default or threaten to default, get into a loan modification program, then bellyache that doing so has lowered their credit scores.

Maybe that shouldn't be surprising in this post-shame age, but as is often the case when you look at the landscape of bad borrowing, the penalties for defaulting are not particularly onerous. In fact, you could make the case that they're not onerous enough.

Smarter people seeking loan mods are wary, with good reason, of how the process will impact their credit scores. Banks do take note when you try to change to the terms of your mortgage. But the bulk of the credit damage comes when borrowers stop paying in order to get leverage over the bank. The actual damage to the credit score based on the loan mod is modest and often temporary.

The frequent complaint about FICO damage is that since the HAMP program was set up, at a cost to the taxpayers of hundreds of billions of dollars, to "help" bad borrowers, it's not fair to keep a record of a borrower's non-payment history.

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?

And that's even if you consider a low FICO score a penalty. It's not. It's a number derived from your demonstrated behavior. If a good credit history is that important to you—and there are plenty of good arguments that it shouldn't be—all you have to do is change your behavior.