There are reports in the news of people who can afford their mortgages but choose to walk away anyways. I’m not making this stuff up.
ETA: I don’t watch Fox News.
Also, we all have what we believe to right, wrong, ethical, unethical, whatever. This forum is called Great Debates. It’s common for most of us to argue what we believe, that’s the purpose of this forum. There’s nothing wrong with me stating what I believe and asking people to challenge me on it, that’s what this forum is all about.
This is an entirely different arrangement than a trust deed. A trust deed is an enforceable contract that explicitly considers all the risks each party is taking. Appraisals are made, there are rescission periods (in most states) and the bank is what the law calls a sophisticated seller of financial services.
The laptop example appears on its face to be price gouging. The laptop is only worth $300 on the open market by the stipulated example. You probably still have a right to collect the balance in a court of law, which the bank doesn’t in a trust deed situation. Now, a lawsuit to collect $300 isn’t going to be cost effective. But transactional costs are present in every situation. Best Buy, which sells these things, factors that into return policies, etc. It is a cost of doing business. A breach of contract is not a moral failing, but it may result in damages to one or both sides. There are legal remedies for that. It is not the same as stealing nor even close.
What are you expecting these people to do? Go out and rob a liquor store? Or do they all have imaginary bank accounts. They don’t. If you want to get on a high horse, I can remember in the early 80s that Donald Trump and/or his companies would jump in and out of bankruptcy with some regularity. If you need somebody to look down on, Trump is probably okay with it. I’ve got a lot of clients who are going through foreclosures and even more people in my neighborhood. We truly don’t need your immature attitude.
I paid you back 300 and gave you a laptop worth another 300. WTF are you whinging for ? :p. Sell it back, rent it, use it to launch a web café, why should I care ? It’s a material good worth what I owed you.
I mean, have you never lent a few bucks to a friend, and have him repay you by buying you a dinner or the next round of drinks ? A mortgage is essentialy the same thing, with more red tape.
No it’s not.
In those legislatures that do not make borrowers repay the loan balance on foreclosure, the banks compensate for that by consolidating the loan on a more valuable collateral, factoring the possible (nay, probable) devaluation of the house. Or at least, they should be if they knew what the fuck they were doing.
There’s a whole branch of accounting dedicated to calculating those exact risks, and the banks themselves are insured to make doubly sure they don’t lose a cent in any eventuality.
If the banks gamble away by accepting to hand out loans on collateral worth bupkis, again, their choice, their responsibility. The borrower didn’t put a gun to their head.
So you are getting your information from “news”. So what it isn’t Fox. It is a 30 second distillation of a problem years in the building. It is a lie and it is full of shit. Do not believe it. You cannot condense the mess a family is facing into a spot on TV or a column. Nor do people want to admit to anyone that they are bad off if they are losing a home. They are. They are in more pain than they think bearable.
Yes, you are welcome to whatever moral code you want to believe. But this is “great debates” and distinctions and definitions and philosophy and laws and business practices are precisely what is being discussed. Is there some written law these people are breaking? No. Is there some professional ethical code that is being violated? No. Is there some moral system that is being violated. Perhaps. That seems to be where your opinion is coming from. Well, moral systems are not just seat of the pants things unless we are drunk at a weekend BBQ and just bullshitting. Moral systems are traditions, written and oral and implied. Some are religious, so cultural, etc. You’ve gotta have more than a weekend BBQ feeling to back up this opinion that moral systems prohibit using the provisions of a series of 50 page documents drafted entirely by the banks (these are called adhesion contracts) entirely to protect the banks’ position. Why can the banks rely on the fine print to raise interest rates and demand balloon payments without moral condemnation, but the human beings can’t? Arming banks with a moral sword because their business partners are human, but not allowing humans a moral shield is unconscionable by the long tradition of the law: contract law is not about morality: it is about offer, acceptance, performance, breach, damages, remedy, etc. Morality is specifically drummed out of students studying contract law and there are no “moral” damages such as punitive damages of tort law or criminal penalties from criminal law.
This situation is entirely different than if your brother loans you $50 and default. That ain’t business, that is honor among family and a great shame. Banks have no sense of shame. They aren’t people.
So should people who default feel shame, if not moral condemnation? Let me assure you that with the exception of sociopaths (which do exist) they do feel shame. But they must go on. They don’t need us judging them.
The Second Stone, you keep bringing up people like Donald Trump I guess because you think that I think it’s OK if rich people and big businesses do this sort of thing. I thought I made it clear that I don’t think it’s OK for them either. I’m speaking strictly on general principle here.
But more importantly, you don’t believe that there are people who quit paying their mortgage even though they can afford it. Since this is the case we really have nothing to talk about. For the last time I’ll repeat that what I’m talking about has nothing to do with those who can’t afford their monthly payments. And again, since you believe that no such people exist then we’re just talking past each other.
As I understand it, the key here is the current value of the asset versus the residual amount of the mortgage. If someone abandons their mortgage due to negative equity, even though they can financially afford the mortgage payment, then the bank loses out to the tune of (remaining value - current house value)
What I don’t see is why we should worry about this. The bank is a financial institution that was aware of this risk when entering into the mortgage agreement. The bank is at this time in a position to protect itself from this situation by requiring a deposit on the house. Some mortgages require 30%, some 0% (at least once upon a time). The interest charged on the mortgage where 30% was put down is less than the one where 0% was put down. This is because the bank recognises their exposure is greater where 0% is put down, so they charge more.
This being the case, I don’t feel sorry for them if the 0% guy defaults when the market is down, because the bank knowingly took on the risk, and charged a higher interest rate due to the knowledge of that risk.
But if the authorities see that you’re about to steal something from me, they’ll interrupt by locking you up (for certain values of “about to”). Likewise, you don’t get to murder me in exchange for the punishment; they’ll bust you for attempted murder, if they get the chance.
But if you want to keep your library book out for an extra week, then, sure, go ahead and take the penalty; no cops will wrestle you to the ground to prevent it, even if they know exactly what you have in mind. Just pay the fine – or keep it out forever, and simply pay to restock it. Whatever the terms of the deal; they’ll let you take either option rather than interrupting with enforcement.
Has the OP ever quit a job for any reason other than being materially prevented from continuing to work there?
Because a job contract is agreed upon by two parties, and if someone is able to work for the company, but chooses not to, then that person breaks the contract by quitting. There may be penalties for quitting, the most obvious being the that the employer won’t pay him any more.
If we take this idea that it is immoral not to hold up one’s end of a contract even one minor step beyond the question of debt, then we plainly see that it leads to stupid conclusions like one could never morally quit one’s job for any reason other than physical disability.
You fucked up. You trusted me. No charge for the life lesson.
This is the key point right here. Both parties mutually agreed to the resolution in the event of non-payment. BOTH PARTIES. What part of “both” does the OP not understand?
One point that I think is important in the debate about strategic default (which is what they do if they can afford to pay, but choose to turn the house over to the bank anyway) is the penalty that they are actually getting, on top of turning over the house.
The credit score (FICO) will take a big hit (I believe 100+ points for a foreclosure/default). This is all well and good if it is only used for obtaining credit (which was the original purpose). However, now it has been bastardized and is used to assess insurance risk and a person’s fitness for employment.
So its not like they get to just turn over the house and walk away no harm no foul. (which I think is perfectly fine, as it is written into the contract.) They are impacted by this negative credit reporting, in more ways than just applying/receiving more credit. That’s the part that is the real problem. Credit scores should only be used to assess credit risk, but unfortunately its used for so much more now. Why the hell should any employer need to evaluate any person’s credit rating - but every single job I apply for is going to look at my credit rating.
Do you suppose a bank has moral qualms when it forecloses on a house worth more than the mortgage balance?
The situation described in the OP absolutely happens. I had a discussion with a friend’s nephew about this situation not long after the crisis hit. He was breaking up with his wife and wanted to walk away from his home because he was upside down on it. He still had a job, and could make the payments. He just didn’t want to (for a variety of reasons, some better than others). We argued that it was immoral/unethical to take a loan and then just not pay it back because you don’t want to. FWIW, his house was in Florida, in one of the hardest hit areas by the mortgage crisis. I have no idea what the actual legal implications would be.
So, for the record, I think it’s wrong to enter into a contract and then exit that contract when you still have the means to fulfill that contract. I also think that the various banks and mortgage brokers caused the problem by issuing bad loans out of greed. And near me there was a lot of out and out fraud, mainly due to lax or no regulation in the Florida mortgage business. That may sound a bit conflicted, but I’m of the “two wrongs don’t make a right” school of thought.
I’ll promise to move heaven & earth to repay a mortgage when the bank gives me treasury rates on my loan. The entire reason why you pay higher interest on a loan is because the bank is assuming the risk that you default. If it’s not OK for me to default, it’s not OK for them to charge me more than the risk free rate.
Once again, morals do not enter into what is essentially a BUSINESS contract. The bank/lender does not have morals. They enter into the contract with full knowledge that there is risk involved, and the house may at some point be worth less than the mortgage. The know this risk. They set thier rates accordingly.
Whether you think it is “immoral” to invoke a clause in your SIGNED CONTRACT that says they get the house if you stop making payments is immaterial.
It is a legal business decision.
As someone already pointed out, a bank has no moral problem forclosing on a home where the owner has lost his job, and has already paid 95,000 of the 100,000 mortgage. They’ll happily take the home, sell it for 100,000, and pocket the 95,000 in previous payments. It’s a business decision.
eta: And don’t say “well two wrongs don’t make a right.” Neither situation is wrong. They are both legal business decisions, and moral “right and wrong” don’t have anything to do with them.
Has there ever, in the history of stupid, been someone so stupid as to allow their house to slip into foreclosure when they’re actually that far ahead of the game? They could sell the house for below market, and after the commission and other charges, walk away with pockets full of cash.
If it were just between me and the bank, then maybe I wouldn’t consider it immoral. But in a phase like we’re in right now, if everyone just walked away, the market would get worse, and the economy would probably go into full on collapse. I’m thinking of the impact on my neighbors and fellow citizens, not the impact on the bank, per se.
I think the important point that’s missing is that the contract (mortgage agreement) doesn’t just say “I agree to pay the bank bank $300K over 30 years”. It says that you agree to pay them back that money over that time and it also specifies exactly what happens if you don’t - both sides are agreeing that for whatever reason the lender (the bank) may not get their money from the borrower and the way that they have agreed to handle that situation is by the ownership of the property reverting back to the lender. So it may suck for various reasons if the borrower decides to walk away but that possibility was explicitly considered in advance and both sides signed a contract detailing what happens at that point. The borrower isn’t breaking the terms of the contract by walking away and the lender isn’t either by taking the home. IANAL but from a strictly legal standpoint I don’t see where either party is doing anything wrong, they are both living up to their end of the contract.
It’s not the same. One is a criminal act which society has decided is worthy of punishment by the state; the other is not, and society does not deem it worthy of punishment by the state, it has merely decided that financial resitution to make good is the appropriate measure of a contract’s moral worth.
I’m of (personal) agreemeent that the behaviour is morally ambiguous, but it’s not illegal. If society deemed it to be so, it would become a criminal offence.
Foreclosures don’t work like that. The bank can only reclaim the principle balance of the loan (plus fees, of course). The equity goes to the owner.
Thanks for that - ignorance fought!