Is walking away from your mortgage unethical?

[toadspittle]

Spurred by this NYTimes story:

Walk Away from Your Mortgage!

Is it unethical for a homeowner to walk away and default on his or her mortgage–even if he or she could still find a way to pay for it? I’m not talking about people who are at risk of immediate foreclosure, but those who look closely at their finances and say, “You know, I could be doing a lot more with my money, and be in a lot better financial situation, if I got rid of this one liability.”

My instinct is yes, of course that’s unethical. You’re supposed to follow through on your promises, including your promise to pay your mortgage.

But as the article notes, no one seems to be upset when a bank or large corporation walks away from a bad investment. In fact, it’s considered prudent! Good business!

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

So why is it unethical for a homeowner to walk away from a liability when it’s sound business sense for a large corporation to do the same? Or is it just my ingrained Protestant work ethic telling me that’s the way things SHOULD be, even though it’s smarter financially for homeowners to ditch liabilities?

The bigger fear banks and the feds have is that, if this sort of walk-away-from-your-debts thinking becomes widespread and acceptable, then the economy will completely collapse due to a wave of defaults.

But again, should that be an ethical problem for the individual homeowner? Should he or she face a diminished financial future instead? Should his or her children face diminished college education opportunities as a result of these tightened finances? Should the community face diminished charitable gifts and available time for volunteering from this homeowner, who may have to work longer hours to service this debt?

Should it be an ethical problem for large corporations in this situation? How would those corporations’ stockholders react if the CEO said, “We made a bunch of lousy investments last year, but we’re not going to write them off. Instead, we’re going to keep servicing that debt at a significant financial loss for at least the next five years, possibly longer. Because it’s the Right Thing to Do. Sorry that your share prices have plummeted and there will be no dividends for the next decade, at least, but I’m sure you’ll feel good that we’re being Responsible Citizens. After all, if every company walked away from these sorts of losses, what would happen to the US economy? Thank you, and I’m sure you wouldn’t even THINK of selling your shares and investing that money in a more profitable company that DOES write off these sorts of losses. That would be unethical.”

[Cat_Whisperer]

My first instinct is like yours - you pay for what you said you’d pay for. But, as you say, those rules only seem to apply to the little guys, often to great personal detriment. I’d say I’m getting a lot more soft on the ethics of walking away from mortgages.

[conurepete]

Before the meltdown and TARP it would have been unethical. Since the bailout, it is not

[yorick73]

Why would it be unethical? In theory the interest rate is set by the amount of risk of a particular loan. This is secured debt, unlike credit card debt, and the bank owns the home if you walk away. In the past, and maybe more now, banks required a substantial down payment as a disincentive to walk away.

[Phatlewt]

There are terms in the contract for walking away. Why it is unethical to do anything within the terms of a contract is puzzling to me.

@NYT Article

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

[Simplicio]

nvm

[shiftless]

It’s business. Worrying about ethics when dealing with big businesses is coming unarmed to a gun fight.

[Kearsen]

If it wasn’t “unethical” in the sense that society would look at walking away as a wrong doing, why does your personal credit rating take a hit when you are already losing the property bound to the loan?

Edit: Or in the case of a contractual obligation, do you think corporations would elicit loans that have a strict ’ no credit reporting’ clause?

[Oakminster]

Similar thread, with poll, from IMHO

[yorick73]

@Kearsen

If it wasn’t “unethical” in the sense that society would look at walking away as a wrong doing, why does your personal credit rating take a hit when you are already losing the property bound to the loan?

Edit: Or in the case of a contractual obligation, do you think corporations would elicit loans that have a strict ’ no credit reporting’ clause?

No, you are considered a higher risk and your credit rating takes a hit. Don’t confuse ethics with risks.

[Kearsen]

@yorick73

No, you are considered a higher risk and your credit rating takes a hit. Don’t confuse ethics with risks.

Of course, but the risk associated with the financial gain should offset, no?

If the loan is worth $500k but the property is worth $750, is the risk worth the reward?

What makes it worth the reward if not money? It surely isn’t a credit rating.

[gonzomax]

Banks have made it clear that ethics have no place in financial dealings. They have been guilty of horrible wrongdoing. Ethics are not only applied to one side in a deal.
When it comes to money, the country and right and wrong are apparently irrelevant. If it makes money for you, you are entitled to do it. Paying a mortgage for a house that dropped deeply in value, due to no wrong doing on your part , would be stupid. You can be sure if the bank were in that position they would not pay it. They would get the taxpayer to do it.

[yorick73]

@Kearsen

Of course, but the risk associated with the financial gain should offset, no?

If the loan is worth $500k but the property is worth $750, is the risk worth the reward?

What makes it worth the reward if not money? It surely isn’t a credit rating.

I’m confused about what you are saying. Are you suggesting that people walk away from a property where the property is worth more than the loan?

[Palo_Verde]

I still think it’s unethical. Playing the “But everyone else is doing it” card sounds something like my 12 year old would say.

You are responsible for your own ethics, and how others behave should not affect that. When you make an agreement, you have the ethical responsibility to live up to that agreement to the best of your ability.

[Kimstu]

Don’t credit card companies frequently phone the heirs of people who died with more credit card debt than their estate could cover, and nag the heirs to pay the debt (which they are in no way legally required to do) in order to save the “good name” of the deceased from the “shame and disgrace” of having stiffed their creditors by becoming a stiff?

If a business folds due to lack of funds and can’t pay off its corporate credit card(s), I seriously doubt that the CC company tries to shame anybody who isn’t legally obligated to pay the debt into paying it anyway. And if they tried it, I bet they’d get a big horse laugh for their pains.

Any other examples of financial situations where individuals are typically pressured to go against their own interests for the sake of being “honorable”, but businesses are not?

[Dinsdale]

I’m not sure it is often unethical for one party to abrogate a contract, so long as the parties entered into the contract knowingly, and the abrogating party participates in whatever recourse is applicable under the contract and law.

[otternell]

Bringing ethics into a business decision is simply silly. The contract states either you pay or we get the property. So what if people are choosing option B - that’s their right under the contract. You don’t see the CEO of Morgan Stanley wringing his hands over the “ethics” of ditching commercial properties do you?

We need to quit holding individuals to higher standards than we hold corporations.

[Malthus]

Seems to me to be no more than “efficient breach”. If the penalties for breaching your contract, agreed to by both parties, are less severe that the hit you would take carrying out the contract - breach away.

Of course, you gotta figure in your credit rating too.

[Ravenman]

@Phatlewt

There are terms in the contract for walking away. Why it is unethical to do anything within the terms of a contract is puzzling to me.

I agree with this.

Let’s say you put a large amount of money in a long-term CD. The bank tells you that there is a penalty for early withdrawal. If you are willing to pay the penalty, there’s nothing unethical about withdrawing the money. Your conceptual “promise” to allow the bank to keep the money for the full term does not limit your ability to exercise whatever specific options are contained in the actual contract that you and the bank agreed to.

Similarly, on a mortgage, you and the bank come to a specific agreement on the terms, conditions, and penalties for borrowing the money. If you are willing to accept the penalties for defaulting on the loan, the bank has already agreed to those terms. A lendee exercising that option is no different than someone canceling their cell phone service and paying an early termination fee.

I do not expect to have to default on a mortgage, but when I got my mortgage, the bank and I agreed on terms for what would happen in case of default. If the bank is now not prepared for the fact that I, or some other homeowner, may default on the loan, they should have included more aggressive terms for default when we signed the contract. My sense of honor to pay my debts does not supersede the actual terms of our agreement.

[otternell]

@Ravenman

I agree with this.

Let’s say you put a large amount of money in a long-term CD. The bank tells you that there is a penalty for early withdrawal. If you are willing to pay the penalty, there’s nothing unethical about withdrawing the money. Your conceptual “promise” to allow the bank to keep the money for the full term does not limit your ability to exercise whatever specific options are contained in the actual contract that you and the bank agreed to.

Similarly, on a mortgage, you and the bank come to a specific agreement on the terms, conditions, and penalties for borrowing the money. If you are willing to accept the penalties for defaulting on the loan, the bank has already agreed to those terms. A lendee exercising that option is no different than someone canceling their cell phone service and paying an early termination fee.

I do not expect to have to default on a mortgage, but when I got my mortgage, the bank and I agreed on terms for what would happen in case of default. If the bank is now not prepared for the fact that I, or some other homeowner, may default on the loan, they should have included more aggressive terms for default when we signed the contract. My sense of honor to pay my debts does not supersede the actual terms of our agreement.

Good summation!