"Strategic" Mortgage Default: Why It's Not Unethical

The Big Money:

Last month a study from the credit reporting agency Experian and consulting outfit Oliver Wyman estimated that close to a fifth of troubled mortgages involved borrowers who were "strategically" defaulting--walking away from mortgages they could pay but decided not to because they owed more than their houses were worth. Self-assigned guardians of financial ethics see the willingness of borrowers to abandon their mortgage debts as a sign of the "erosion of social and moral standards." The aim of these critics is to shame debtors into sticking with their mortgages. That's something debtors should take with a grain of salt. There are many good reasons to keep paying your mortgage and avoid the black mark of foreclosure, but the immorality of sticking the bank with a loss isn't one of them.

Read the whole story: The Big Money

Comments

[vooter]

LOL! Not only should people not be afraid to walk away from an underwater mortgage, they should actively seek out ways to hurt the banks as much as possible. Every patriotic American should do everything they can to help wreck the U.S. and world banking system. Not only do the bankers deserve it, it's the only way that these creatures will ever be made to understand what kind of subhumans they actually are and why they should be punished....

[menlopian]

I've seen this argument before: depends on what your definition of the word "is" is... depends on what your definition of the word promise is. It's a rhetorically bankrupt argument; this article is rubbish.

[jeremyemilio]

Nope. It's your analysis that is 'rubbish.' A mortgage isn't a 'promise'; it's a contract. The conditions of most mortgage contracts are quite simple: the mortgage holder gets to keep possession the home as long as s/he continues to make payments. If the mortgage holder stops making payments at any time before the mortgage is paid off, the lender takes possession of the home (this is true up until the moment the final dollar is paid, btw, which means most foreclosures throughout history have worked in favour of the lender). It's a very basic "if/then" scenario that is built into the contract. In other words, the act of walking away from the mortgage and giving up the home is not breaking an agreement; it is a part of the agreement that that is every bit as valid as paying the mortgage and remaining in the home. Period.

[econ1]

The bank loaned against the collateral of the house. That was the contract. So if you really think it will not get back above your mortgage and carrying costs you should walk. The next time you get a loan people may want a contract with more of a down payment but that is probably what we should be doing anyway. Unfortunately the taxpayer gets the shaft here and unfortunately Washington is still promoting loans with far too low a down payment ratio.

[ReesieKitty]

The bank loaned against what the house's market value was at the time of the sale. But now we're being told that market value is not the standard, so the mortgage will not be adjusted to the actual market value.
. Doesn't that seem like a double standard to you? If the BANK had no clue that our house would be worth $100,000 less as a potential loan investment 3 years ago, how are WE supposed to have had a crystal ball to have foreseen it?

We put money down, but it makes no difference now- Bank of America, a bank we would NEVER have done business with given the choice, BOUGHT our mortgage, so we are stuck dealing with them and they set all the rules on both sides with no consumer protection at all. We both had to take large paycuts from our full time jobs, our house is worth much less than what the sale price was- but we can't refinance and are supposed to just keep doing business with a loan servicer we did not choose and whom we believe to be unethical. We need REAL consumer protection for people who have invested in their homes and don't HAVE any other portfolios or investments to 'fall back' on.

When Wall Street improves, I am not seeing any trickle down effect. I just want to pay what my house is WORTH. Bank of America says one thing- the country says something else. Who do we believe??

[econ1]

The amount of the mortgage doesn't fluctuate with the value of the house (ie. it doesn't go up when the value goes up, or down when it goes down).

If the value stays flat, the borrower gradually pays off the principle and eventually (30 years) owns the house outright (sort of like getting the pink slip on the car).

If the value goes up, the borrower gets the gain....the bank just gets the loan paid off and the interest.

If the value goes down to the mortgage value at the end of the mortgage the borrower has a house worth less than he paid for it. But he has the value of having lived in it for 30 years (savings in rent).

If the value goes down further than the mortgage the bank and the borrower have both lost money.

If indeed the house is worth a considerable amount less than the mortgage owed, then you might consider giving them the keys.

[DismayedRepub]

There are a number of bad things that happen when you walk away from your mortgage. Not only do you hurt your own credit rating but you can bring down your neighbors as well. When a house is foreclosed all the other houses in that neighborhood lose some amount of value. This may prevent your neighbor from being able to refinance and ultimately cause them to default too.

The other thing that happens is that most mortgages are guaranteed by the FHA these days. To the tune of almost $1 Trillion. When you default on your paper the taxpayer is on the hook to cover your mess. When you walk away the man you’re sticking it to is not the banker, it is me and every other person who is trying to make a go of it in these horrible times.

[jeremyemilio]

See, I call BS on your basic premise. Every action has a series of effects, some intended, some not. That's a given. But the idea that I should hold onto my home because if I don't I will devalue my neighbour's home is a stretch to say the least. You might just as well say that I shouldn't ever try to sell my home quickly by putting it up at lower than the going market value because this, too, will reduce home prices around me. Or, more to the point, couldn't you argue just as legitimately that to default actually does a service to all those people out there who would like to buy a home but can't afford one at current prices? If my actions help bring home prices down, doesn't that help just as many folks as it harms? Why am I more beholden to sellers than to buyers?

As for the FHA guarantee, well I think you should probably take that up with the FHA. When banks make a profit on foreclosed homes, they keep that profit to themselves and when they lose on a foreclosure their losses are covered by the American taxpayer? As a Canadian I've got to say, that's a pretty awful deal they've signed on your behalf.

[Bee]

I know someone who bought a condo as a rental property. The condo became uninhabitable because of leaky pipes and mold. The HOA couldn't fix the damage because it was bankrupt (because there were several foreclosures and empty units). So the person chose to walk away from the mortgage.

[mjtaylor22]

TEH WEALTHY GOT A BAIL OUT
THE WORKING PEOPLE GOT THE SHAFT, AND THE BANKS KEEP CHARGING REGULAR WORKING FOLK MOR EN MOR E

[ResearchtheFacts]

It's called survival. The same deadbeat banks, yeah the one's who just defaulted on their payments of taxpayer money pay back, left homeowners holding the bag.

Now these same homeowners have decided to leave it right were it was handed to them, on their doorstep.

[BernankeMadoff]

The government has put the same punch bowl out that got us into the mess in the first place. More debt and consumption and don't worry about paying it back. (Berbnanke= Greenspan II)

Good articles: http://pie.im/af30

If this is change we can believe in, count me out in 2012. Obama should not have reappointed bernanke.

[hoopesaz]

It's about as ethical as banks foreclosing on folks who lose their jobs. If you don't think that's problematic, than surely this wouldn't bother you either.

[jeremyemilio]

Bingo.

[jcranman]

Ethical? You have got to be kidding. In a society that refuses to allow health care access to it's most needy citizens, there are no ethics. Like everything else nowadays, it is a feel good word that we use to further delude ourselves into believing we live in a "civilized" society. USA has one common ethic: make money.

[ResearchtheFacts]

The irony of our entire system. No body believes in it, and we just daily go through the motions. We learn it so we can protect ourselves.

Government tries to regulate banks and credit. They study the rules so they can get around them. Our government in the middle of the night sends more troops overseas and the people, we find out in the morning. We don't make the rules, we just play the game whether we want to or not... we are in it.

Unfortunately, for a long time its been every man for himself.

[menlopian]

one wrong makes another ok? this is such a poor argument.

[StJames]

I worked with a young man who bought a condo about 4 years ago, in a brand new development. Many of them have gone into foreclosure and somehow Section 8 families have been moving in. As is almost always the case when people don't own the property, the place has started to deteriorate. He lost his well paying job about 10 months ago, found new employment but it is a stretch to keep up the mortgage payments. The last time we spoke he was seriously considering walking away from his mortgage because the bank would not work with him at all. He has excellent credit, and hates to lose that but he's afraid his condo investment will never recover because of the rapid deterioration. Not to mention his once nice neighborhood is no longer safe, there's a crack addict upstairs, fights almost every night and the police are called every day...often more than once. I do believe I hate banks and mortgage lenders.

[rtb61]

You cannot escape your word, your commitment, while it might make business sense in the corporate world of lie, cheat and steal, it will alwasy be unethical and immoral to break your word. Would I recommend it to anyone to escape a bad underwater mortgage, only with the proviso of acknowledging they are breaking their word and they are not to be trusted. Are they any worse than the corporate executives, far from it, those executives created the circumstance that feed their bonuses with short term pretend gains, that crippled the economy and drove those mortgages underwater.

[NHGranite]

Let's follow the same ethics that the banks and insurance companies followed, since that level of ethics is the new standard. That's all we're saying. As if the banks would allow the programs out there to save mortgages IE Making Home Affordable - HA! They got all our money first from hyped up loan programs and then from the bailout, and they still won't help us.

[jeremyemilio]

But it's NOT your word. It's a contract. The conditions of foreclosure are part of the contract. IF you make your payments, THEN you get to keep possession of the home. IF you don't make your payments, THEN the lender takes possession of the home. EITHER scenario is an equally valid and actionable aspect of the agreement.

It's like any other "if/then" contract, such as the explicate or implicit contract attached to any employment, for instance. If I continue to come to work, then my employer must continue to pay me. But what if I find another job? What if I relocate? What if I retire? Am I breaking my word? Nope. The employer just stops paying me. I'm not BREAKING the deal. That IS the deal.

[hellboundtrain]

Apparently, nothing is immoral or unethical. Only select laws will be applied occasionally; on a whim.
This is not sarcasm or snarky; it is just the way things are.

[Polly]

If your mortgage was with your small local bank, the way it use to be I feel these business choices of walking on your loan would not take place. When Banks started selling these loans they became impersonal, your not sticking it to anyone you know - just a Bailed out Corporation who cares little for you.

[Hdaryl01]

A friend did this with a business and its loans in 2008. He had a funding commitment (contract) from the bank that had been relied on by him, the state, and city. He purchased a building in early 2007 with 40% of the bank's commitment. He chased the bank for the remaining 60% for the next 18 MONTHS!

He kept getting jacked around. Refinancing proposals. Restructuring proposals. SBA alternatives instead of conventional financing.... Finally, he forced the issue. The banker called and asked him what he was going to do. He said, it's not what I'm going to do that matters-it's what you're going to do that does-if I get the money promised me 18 months ago, I'll continue to ramp the business (which was exceeding projections)-if I don't I'll close the doors Friday-your choice. Nothing happened. He laid 10 people off Friday, flushed hundreds of thousands of dollars in revenue and a going concern, walked, and the bank lost much more than they had reneged on.

Unfortunately, he had cashed his 401K, 529, home equity, and savings to fund the business in the absence of the banks committed loan for 18 months.

Thus, he now has nothing. But, his employees, customers, suppliers, and tax folks all got paid. If he had waited longer, this wouldn't have been the case.

Moral of the story-don't wait so long-and don't cash your 401K, 529, savings, and equity to fund a business the bank reneges on funding.