I am quite undecided about this turn of events in the housing market. Banks’ mail jingles as borrowers walk is the headline on a commentary by James Saft. For anyone who hasn’t come across the phrase “jingle mail” yet, it describes the phenomenon of homeowners walking away from a home because the debt owed is greater than its current value—and so, they mail the keys to the lender. The unmistakable signal jingle mail sends is, “I’m done here. The house is yours.”—thus breaking the mortgage contract. Is that wrong? I’ve seen a fair bit of commentary arguing both ways; but none of it has been from a pro-freedom perspective.

The initial impulse would be, I think, to say that yes, it is wrong: just because a contract becomes inconvenient or painful to honor doesn’t mean it can be discarded like soiled toilet paper. However, there’s a good reason why so many subprime, Alt–A, and other mortgages have become known as “liars’ loans”—both parties exhibited significantly less truthiness than used to be the case when seeking or making a loan of such magnitude. Encouraged by Bush’s rhetoric of an “ownership society” and interest rates that were (artificially?) low, many people who previously were viewed as too high-risk to get a mortgage loan were able to do just that. The fact that some of these individuals weren’t called on the gross exaggeration of their assets should have been a warning, but for many who had previously been unable to attain the “American dream” of home ownership, having the opportunity to do so at last possibly outweighed whatever good judgment might have been present. And I can’t begin to explain why a bank or other lending institution would either not do their due diligence on these applications, or not pay attention to the warning flags that surfaced if it was done. One explanation I’ve encountered is that profits from fees peppered throughout the mortgage process were so good that loan repayment became a secondary issue. (Similarly, I expect that visions of refinancing fees danced through the lenders’ heads too.) If accurate, that should have been a telling signal of mania rather than a healthy market, but with everything looking so good, who paid attention?

Well, the mania has ended and the mess is upon us all, and more of us are paying attention. Saft summarizes a few of the issues:

While the law varies from state to state, in many parts of the United States mortgage lenders cannot go after defaulting borrowers' other assets. And even where they can, few lenders take the expensive and low-yielding option of chasing down borrowers who walk away from loans.

The scale of the potential problem is huge.

Mark Zandi of Moody's Economy.com estimates that 10.6 million homeowners will have zero or negative equity by the end of June, or 21 percent of first mortgage holders.

The impact of a new wave of defaults will also be potentially important. Banks and other investors in mortgages, as has been seen, will take further hits to their already weakened capital.

While few might shed tears for banks, this means a longer and deeper credit crunch. It will also mean a wave of new properties hitting the real estate market, driving prices lower still, as banks seize and seek to sell the houses homeowners have fled.

To give a flavor of the impact, Zandi has estimated that every foreclosure on a neighborhood block reduces the value of all homes on that block by almost 1.5 percent.

Some scary numbers in there ... but realistically, what else should one expect from a business sector that was allowed—some would say “encouraged”—by federal policies to balloon? Sure, it hurts to see so much human productivity go to waste (or worse, be destroyed), but the fact is that many of these institutions were not accurately portraying the terms of the mortgage loan to prospective home buyers—I daresay it was clear in a number of cases that the customer was barely able to make the teaser-rate payments (that did its job too well, one might say). So what would happen to those home “owners” when the interest rates reset higher, as many did? We’re seeing the answer to that, in waves of foreclosures and bankruptcies. And now that interest rates have dropped, some lending institutions are doing their customers the dubious “service” of allowing them to refinance now, rather than wait for the reset to happen. Why? Because the institution gets immediate cash in the form of refinance fees, and it’s a good bet that the refinance interest rate will be higher than the reset rate. How’s that for servi(ci)ng the customer?

As an individual who considers herself to have strong moral principles, I don’t like to see contracts abandoned. However, as an anarchist and individualist, I see good reasons to consider at least some of these contracts null and void from their inception. The initiation of force and fraud is considered by libertarians to be wrong. I don’t know that anyone could sift through all these loans and authoritatively determine how many were actually fraudulent: but it seems to me that in a larger context, the housing bubble was itself a fraud that sucked in many individuals. Some didn’t know better; others did but their greed got the better of them, perhaps. The federal government and the banking/finance industry created the environment to allow this to happen, not bothering to think about the consequences when the market turned. In their hubris, many didn’t believe the market would turn!

How did a necessity like shelter become such an expensive racket, anyway? When was it first decided that Farmer Paul couldn’t simply sell pieces of his 180 acres to people who wanted their own plots to do with as they wanted? Why does it take the black-box magic of a “developer” to buy “worthless” farm land, do little to substantially improve that land, and turn around and sell parcels of it for astonishing sums of money? (Yes, sometimes developers put in infrastructure, such as hooking up to water, sewer, and power services, but it can be argued whether those are genuine improvements. Besides, why assume every potential buyer wants to suckle on the state’s infrastructure teats?) Is a McMansion really so much better at the job of sheltering a family than a cozy, family-built log cabin?

There’s no escaping the economic fallout of the housing and credit problems, even for individuals like me who do not own a home. I don’t like to dwell on the pain that may be coming down the road, and that may linger on for a very long time as a consequence of what was truly “irrational exuberance” (perhaps the only thing Greenspan got right!) ... but ultimately, the cause of the pain lies at the feet of the institutions of coercive government, along with housing and lending institutions. Thus, I am okay with the phenomenon of “jingle mail”. Perhaps fraud cannot be determined in every case, but there’s fraud shot through these systems. (If you desire proof, I encourage you to make Market Ticker and Mish’s Global Economic Trend Analysis part of your regular reading.) It may be a naïve hope to think that the collapse of these systems will lead to simpler, freer solutions, but I have been called naïve so many times, once more won’t hurt.

So, there’s my long-winded answer to the question. If you’ve a mind to do so, you can weigh in by voting in this poll and coming back here to discuss your views, if you like. The poll will run for a week.