You see the foreclosure and credit score hit as not punishments and deterrents, but as simply a valid option to paying. So what would a contract have to say, or what penalties would it have to have for you to see not paying if you can afford to as either not an option, or, wrong* or unethical*?
Please note, I am only talking about defaulting on a mortgages where the person can still afford to pay.
*If you believe in right and wrong or ethical and unethical behavior of course.
I agreed to a mortgage? still live there? and have no problem paying?
I can’t imagine going into default, I currently live in a house that is less than I paid for it, but I have paid off enough that I could sell it and make “some” profit so maybe its not the same, but I like living here and unless I need to move for some other reason will keep paying the mortgage payments.
You’re missing the point that the pro-defaulters (for lack of a better term) are making: If you’re operating by the terms of the contract, including willingly incurring the penalties for defaulting, you’re not operating in the moral realm, you’re operating in the contract realm, and they’re separate. Defaulting while being able to pay says nothing about your view of right and wrong. The whole point of a contract is to spell out the various outcomes and consequences just to avoid leaving their resolution up to some arguable and unarticulated sense of “right and wrong”.
A contract is a game with clear rules. Any move permissible in the game is by definition, permissible, and says nothing about one’s view of morality outside of the game. In chess, I aim to murder the opponent’s king, and doing so is acceptable, though murder remains morally wrong when not playing chess.
To answer your original question, I would say that a contract would have to contain a clause saying something like “if you’re able to pay and default anyway, you’re liable to X penalty above and beyond the normal penalties articulated elsewhere.” I don’t think a lawyer would have too much trouble writing contract language that applied various default penalties based on your continuing level of income.
I only put that in because there’s at least one doper who doesn’t believe in morality or ethics at all. For anybody like that, or for anybody who believes in them, but don’t think that they apply in this situation, they can disregard the part about not paying being wrong or unethical.
But even with increased penalties, walking away is still an option right? Correct me if I’m wrong, but I don’t think legally a lender could have in the contract something like, “non payment is not an option.” So, leaving aside such things as morals, ethics, and good faith, it would still be OK to walk away right?
Why are you bringing ethics into this? There are no ethical obligations here. You’re dealing with a big business, not your next door neighbour. If you’re abiding by the rules that the bank agreed to then you’re doing everything correctly. Why are people so keen to analyse the “ethical” implications of a business decision? Especially when big banks wouldn’t miss a chance to fuck you over if it meant more money for them?
Yes, but it changes the math, hopefully enough that one has an incentive to keep paying despite being underwater.
Someone more knowledgeable than me would have to comment here. I think it is possible, insofar as there are various types of loans that are not discharged during bankruptcy, even–I believe student loans can’t be escaped even with bankruptcy.
Sure, if you’re willing to take the hit specified in the contract.
Being a huge fan of consistency, I believe it’s wrong for both the banks, and individuals to engage in this kind of behavior. And if you’ll leave ethics out of dealing with businesses, why bother bringing them into dealings with your neighbor next door?
Both concepts, “It’s wrong to default on your mortgage if you can still afford it.” and “Banks and other lending institutions often act like scum.” are two independent concepts and exist side by side. One doesn’t invalidate the other.
I can’t think of a legal clause that triggers any “moral” thinking. It’s just a business transaction for both sides. What about the reverse situation? If a house owner wanted to drop out of the corporate rat race to volunteer in Africa, should the bank also feel “ethically obligated” to reduce the mortgage or suspend the payment schedule to enable this unselfish act of generosity?
Morals about house payments apply to the old days. A bunch of farmers in the surrounding area all get together on Saturday and “raised the barn” while the wives make a big meal and a bunch of lemonade. Over time, you could “pay back” the neighbors sweat equity with your crop harvests and so on. You couldn’t just sit on your ass leaving your crops to die or skip town and stiff your neighbors. That’s not even close to the dynamic of relations between today’s bank and a mortgage holder.
I used to be quite hurt about the fact that my banker didn’t send Christmas cards asking me about my cat but with counseling, I eventually got over it. It’s just a business.
I don’t think you can come up with standard language to encompass “afford to”. It would probably have to go into arbitration to determine what payments must be made. Both parties agree in advance to who the arbitrator will be in the event of a default.
For example, do I have to pull my kids out of college in order to “afford to” make payments? What about other debt that I have?
I realize this is not exactly responsive to the OP, but it’s worth knowing that you cannot have the contract the OP imagines in American contract law. American contract law requires that the penalties for breaking a contract be proportional to the loss experienced by the non-breaching party. That’s why AT&T can’t just charge you $1000 for breaking your cell phone contract; they have to calibrate the amount to how much time you have left on your contract and how much it costs them. This is precisely because we recognize that it’s a good idea for people to be able to break contracts when it makes overall financial sense.
I don’t see the ethical problem in deciding to incur the penalties as an alternative to staying in the contract, in and of itself.
Ethics might enter into it is someone wants to argue that your intent was always to breach the contract, that you didn’t sign it in good faith. As an example, Company A is considering expanding into a new city. Company B, already established in the city and a direct competitor to A, is opposed to this. Company B purchases a large vacant factory building in the town, the only viable location Company A has considered. Company B holds onto the property just long enough for Company A to commit to expansion plans in a different city, at which point Company B defaults.
The mortgage holder has a case, I figure, to claim Company B acted in bad faith, with no intention of paying off the mortgage. They can argue an ethical violation occurred, try to introduce it in court while seeking legal remedies over and above the agreed-upon default penalties.
I am certain my terminology is incorrect, but I don’t intend to let it bother me.
That’s part of my argument. People are saying that lenders don’t really put anything into their contracts that prevents people from walking away, but I think the only reason they don’t do so is because legally they can’t. So it’s not that they’re OK with you walking away, it’s just that they can’t legally stop you.
Yeah, I think that’s correct. But the reason they can’t legally stop you is that we think doing so would (a) go beyond what is required by justice (i.e., full compensation) and (b) would be harmful to the efficiency of our economy.
It’s an economic and contract decision and not a moral one. I balance the cost of defaulting/likelihood of a rebound versus a strategic default.
and I believe if you have enough money and a big enough downpayment, then you’ll be able to get a new loan. This based on my lack of credit history in the Us but preapproval of a jumb o loan if I put down 40%.
I personally think strategic defaulters are douches but my belief in free marlets and laws says they have that right to be what I think is a douche
Did somebody hold a gun to their head and force them to make the loan?
This strategic default idea is only really workable in a non-recourse state. In a recourse state, the lender can foreclose and also sue you for any outstanding debt. If the banks weren’t happy with doing business in a non-recourse state, they were free to lend in other states that had appropriate debt collection laws.
The reality is that folks put ethical/moral requirements on homeowners that they would never expect of a bank. Continue to pay money into a bad contract? Any bank would ditch that contract in a heartbeat and pay the penalties, once they’ve determined that it is the “smart” decision to make.
It can conceivably be unethical to default on a contract, but I can’t think of any plausible way to make it unethical to default on a mortgage.
Well, okay, if it’s a small bank and if I knew that by defaulting I would actually cause the bank to collapse and take all of the families and businesses in Seneca Falls with it, that’d be unethical, maybe.
I think people should generally try to abide by the contracts they sign because that makes it easier for the next guy to sign a contract. But I also think that things like mortgage defaults and bankruptcies exist precisely because shit happens and sometimes debt is a real albatross.
But you are abiding by the contract when you default, unless you insist on keeping the house. It’s very simple, but easy to forget that the default option is part of the contract.