Is Strategic Default Morally Wrong?

As the real estate market continues to limp along, more and more homeowners are opting for strategic default - basically walking away from a mortgage you can afford to pay.

Many describe it as a savvy business decision (even if it ruined their credit), but is it a moral shortcoming?

Despite the fact that he and his wife are employed and have an annual household income near $150,000, he's comfortable with his decision.

"I did a lot of soul-searching about whether it was morally the right thing to do," he said. "I felt there was no moral obligation to make a payment. The contract says it's a financial obligation, not a moral obligation.

"I was in a boat with a slow leak. It was manageable, but I know I was slowly sinking."

The decision to walk, tied to a housing crisis that continues to grip the market, is far-reaching, raising serious questions about whether financial commitments can ever be considered optional.

Mary Ellen Podmolik of the Chicago Tribune has the story: Link (Photo: Michael Tercha/Chicago Tribune)


Contracts are moral obligations.

That said, if the collateral (the house) is surrendered, it's pretty much a wash.

Stiffing the lender *while living in the house*, however, is immoral.
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Yeah, I couldn't not pay and continue to live in it. That wouldn't work for me.

But suppose I were ever in a situation where I stupidly mortgaged a house that was 5, 10, 20 times more than I should have, well, I'd seriously consider mailing the keys to the bank and defaulting.
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>How about SELLING the house?

The thing is once the loan is under water it has negative equity. Selling it would be putting oneself under a massive debt. The point of a strategic default is to compare the costs of walking away from the loan to the amount one would be indebted if you sold the house. For expensive houses that have lost a lot of value it often makes more financial sense to walk away. I don't really see any moral element, since financial contracts are not moral relationships. The banks certainly don't act as moral agents (at all, ever), so why should the customer? Business is business.
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What about the bank's moral obligation to the homeowner?

For a contract to rise from just a financial obligation to a moral one, both parties need to have a moral obligation to each other. Since banks treat home loans as just business, homeowners are free to do the same.
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The bank will get the house back. If they made a good investment, they will profit on its sale. If they made a poor investment, that is, loaned someone more than they could afford to pay back on a house than is not worth the amount of the loan, they will lose money.
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The moral obligation should go beyond that between the bank and the homeowner, but extend to the community as a whole. I have a hard time feeling any sympathy for folks who are making near $150,000, or more, a year and have gotten themselves into this situation. If they walk, we will end up paying, either directly through higher taxes, further degraded home values or through another bank bailout. I own my house after 20 years, and now find myself having trouble just making enough to be able to pay the property taxes, my family's health insurance, basic utility bills, and keep food on the table.
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Well, when the own Mortage Bankers Association default as a strategic business move, and just walk away from a loan...

http://www.thedailyshow.com/watch/thu-october-7-2010/foreclosure-crisis
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And another story:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLYZhnfoXOSk&pos=5

FTA: “This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”

Ok, can I use the same excuse if I want to get rid of my mortgage? My bank would say no.
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Selling the house is difficult even when there is no mortgage or financial obligation. I've been trying to sell one for three years now. That's what the market crash really means.
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As an anarcho-capitalist, I define this as fraud, and therefore immoral. You freely contracted to the loan. The bank took on the disultility of not using their own capital for the period of the load, and you, in return, agreed to pay for the use of the capital with interest. Whether or not it benefits you, this is wrong.
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The last commentator has the business model of investment wrong. You pay the bank interest because they accepted the RISK that you might default. If there is no risk, there is no reward for the investment.

You're not paying them because they can't invest their money elsewhere. They choose to invest their money with you deciding that the risk/reward ratio suited their needs, and they tuned the lending rate according to their perceived risk. This was not some great act of charity on their part, it was a business investment, and those are not guaranteed to be profitable.

As long as you fulfill the conditions of the loan contract, you've done nothing wrong. The contracts are very carefully spelled out; its not a loop hole you're exploiting. You're losing all the equity you put in and getting a big negative mark on your credit raking. They're getting the home, and all its potential future value until they choose to sell it, just like its spelled out in the contract.
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Banks are amoral. That's all I know. (Is there still any doubt about this at this point in time?)

I need more information about this particular issue, but am not interested enough to bother.

But if they are not breaking any laws or rules, how can you put blame on them? They are just playing the game, just like the banks are playing the game. Sad world indeed.
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The last bank I tried to get a mortgage from led me on to the tune of several hundred dollars in closing costs, assuring me that the loan would be approved. Then they got cold feet because I am self-employed. They finally required me to lie to the IRS (of course, they never used that word) in order to fulfill my end of the application process. I wouldn't do it, so they left me hanging.

No, that bank has no morals whatsoever.
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Contracts are most emphatically NOT moral obligations. They are legal obligations where each side can act in their own self-interest and suffer any specified consequences in the contract. The person who abandons the home lose the home and suffers financial consequences in the credit rating department. The contract returns the home to the bank. NEITHER side has any moral obligation; only the legal ones spelled out in the contract. No contract is ever inviolate althugh the specified may be severe, any contract can be broken at any time (with the specified consequences).

Businesses do this all the time (cf. Donald Trump and any number of other high financiers who have bailed out of failed real estate development projects).
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It's just plain karma. Banks screwed the public, got their corporate welfare check (and their golden parachute). So a little payback only seems fair.

Screw the banks - they won't/didn't hesitate to screw you.
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First of all, read the article before you comment on it. He isn't living in the house he's defaulting on, he was renting it out. He lost his tenants and couldn't find new ones, listed the house for sale and couldn't sell it, so he decided to default since he didn't want to pay two mortgages anymore.

Secondly, no, it's not morally wrong, it's business. The banks treat it as business. It is a bussiness contract, and it's a secured loan which means the bank gets to keep the house.

And just because the home becomes bank-owned doesn't mean the property taxes don't get paid anymore. The bank becomes responsible for those taxes.
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@Bearfoot, defaulting on your loan isn't a violation of the loan contract, its a fulfillment of it. This is why the bank can't (successfully) sue you for defaulting; it was part of the contract.

This is why you're required to put a down payment into the house. The incentive not to lose that money is supposed to reduce the risk of you just walking away. That's also why the lower the down payment, the higher the interest rate on the loan (greater risk, greater reward). They're not expecting you to repay the loan out of the goodness of your heart; they're making sure you have financial incentives that align your best option with theirs.
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For a long time, banks, credit card companies, mortgage companies all made wildly irresponsible loans to people. Their practices were crooked, and they took ridiculous risks. This seems like a natural consequence. Furthermore, every case outlined in the article showed that people don't default as a course of action. They usually make efforts to compromise and make good, defaulting only when they think it is a matter of survival.
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I don't get the attitude that because 1) it's a bank (so screw them), and 2) it's a legal contract, that a mortgage is not also a moral obligation.

Try putting yourself in the bank's place. Your co-worker borrows $10,000 from you to buy some stock. He signs a loan agreement. The stock crashes and is now worth half that much. He can make the repayments to you but doesn't feel like it because the stock isn't going to regain its value anytime soon and he'd rather free up his money to do something else. So he defaults on the loan you made and hands you the stock certificates worth half what you loaned him. Still think that's an okay way to do business?

Or flip the scenario the other way. You borrow money from the bank to buy a home. The home value skyrockets. The bank calls you up and says, "We changed our mind. We'd rather have the home than the mortgage payment, so we're recalling your loan. We're giving you back your principle payments and foreclosing. Get out." Would that be okay?
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It is not morally wrong in anyway. It is business. And it's definitely how business is done today.

If you don't want to pay for your mortgage anymore, absolutely walk away and don't look back. That is just how it's done now.
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@Jeffos, it's absolutely an acceptable way to do business.

Your hypothetical scenario is a false analogy: When the mortgage contract is signed, it contains specific language saying, "If the borrower on the loan, such-and-such will happen." He's not in breach of the contract, because everything that happens here is contemplated in the contract.

No offense intended, but your "bank decides to call the loan early and claim the house" scenario demonstrates that you don't know how secured transactions work.

The short version: Everyone in this story is perfectly within their legal--and moral--obligations under the mortgage contract. The immoral act would be if one of the parties violated the terms of the contract, i.e., failed to do what they originally promised to do. In this case, that's not happening.
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@Jeffos

A more appropos scenario would be:

You loan your co-worker $10,000 to buy some stock. He signs a loan agreement. You head over to the company your co-worker purchased stock in and dump gallons up gallons of gasoline throughout the building. You light that SOB up and burn it to the ground.

The next morning you ask your friend if he needs any extra time to pay back that loan, because he better not if he knows what's good for him.
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Funny to see all the justifications people are giving for their hatred towards banks.

Also interesting to see how so few people understand, or are willing to ignore, the definition of morality.
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The pathetic thing about smug, self-righteous people, like Teddy here, is that they always employ a double standard. They justify or ignore "immorality" in one party and castigate the other for their supposed wickedness.
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Contracts are only moral obligations if they are honest contracts. If you look at the entire housing bubble, the contracts were not representing enough information to make an informed choice. For example, easy money came from Basel 2 and Wall Street colluding, and this shadow banking system took the price of the homes too high. So, the entire enterprise was a scam. The contracts did not reveal that it was a scam.

You don't have to honor a scam. And house buying at that time was a scam. So you are morally ok with walking away. However, you may have some legal problems in recourse states and even with some loans in non recourse states. So check with an attorney.
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