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)
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.
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.
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.
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.
http://www.thedailyshow.com/watch/thu-october-7-2010/foreclosure-crisis
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.
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.
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.
No, that bank has no morals whatsoever.
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).
Screw the banks - they won't/didn't hesitate to screw you.
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.
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.
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?
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.
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.
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.
Also interesting to see how so few people understand, or are willing to ignore, the definition of morality.
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.