Yes, a mortgage is a contract, a specific kind where the opportunities, in my opinion, to act unethically are very very rare. There are other types of contract where the opportunities are greater.
You don’t get to decide what I can afford.
Yes, I know. I’m trying to get an idea across with imprecise terminology.
I think if you agree to buy something with a mortgage, you should try to pay off the mortgage so that the next guy in line is more likely to get a mortgage at a reasonable rate and with reasonable penalties.
But making it easy for the next guy in line to get a mortgage is what got us into this mess in the first place. Perhaps we would all have been better off it wasn’t so easy to get a mortgage.
There’s definitely a balance to be struck. Driving up the risk too far leads to things like payday loan operations where the interest rates and fees are outrageous.
But yeah, banks got complacent. They should be diligent about the risks they are assuming, and buyers should be realistic about what they can actually afford. I imagine the former is easier to achieve than the latter.
A mortgage is a contract, but many banks packaged the mortgages and sold them. Now they want to collect on them, often without being able to prove they own the property they want to foreclose. Then ,they set up assembly line foreclosure validation with hundreds of people approving foreclosures without even reading what they signed. That is fraud. In many states the banks don’t even have to go to court. Others rubber stamp them, approving all of them without the owner being represented at all.
We should stop all foreclosures until the process is cleaned up and legal.
The only unethical default on a mortgage is if you stop paying, and burn the house down. That deprives the bank of their legal remedy under the mortgage, though I suppose they could pursue some sort of insurance claim. But that would be unethical on the homeowner’s part, in my opinion.
Hi. 
Just to clarify what it means to “not believe in morality or ethics,” I believe that when a person says “that action is immoral,” all they are really saying is “I don’t like that action.” An action is not objectively morally right or wrong–there is no experiment or test a person can perform to determine whether an action is moral. It’s just a matter of opinion. But for some reason many people are not happy simply expressing their opinion, they have to elevate it by pretending that they have the ability to tap into the “moral realm” and determine whether an action is right or wrong in an objective or cosmic sense that is unconnected to their own feelings about it.
Story in the Detroit papers about a person in foreclosure who came into some money. she wanted to pay it off. She was dealing with banks, mortgage companies and collection companies. When she asked who to pay, 4 companies raised their hand saying "pay me’.
Can I, as a lender, write a loan contract that specifics that if the borrower defaults, they can’t get out of paying me back by declaring bankruptcy? Does US law allow a lender and a borrower to make that agreement?
No. Federal statute empowers judges to discharge the debt, and unless the federal statute provides an exemption, the debt can be discharged. It is not something that can be contracted around, as this would completely undermine the statutory scheme.
(IANABrankruptcyA.)
Not only are strategic defaults OK, but they should be encouraged. Could you imagine if we had tens of thousands of borrowers in their homes paying the banks an amount of money that is disproportional to the value of the home? Such economic waste.
Plus they cannot sell their home for a long period of time, due to being upside down, and turning down employment elsewhere or a better opportunity because they are trapped in their homes
That’s the reason that US law prohibits penalty clauses. We want to encourage efficient breaches of a contract to best allocate economic resources.
It’s not just US law. The English common law is the source of the prohibition on penalty clauses. The common law in turn has been adopted in countries around the world. There may be particular deviations from that principle in particular jurisdictions, but the general principle is that penalty clauses are not acceptable if they’re disproportionate to the economic loss caused by the breach of the contract.
I think the civil law also forbids penalty clauses, but I’m not as certain about that.
Well, contracts usually contain some sort of penalty clause for situations where one of the parties wants to get out.
Did the banks forget to include something like that in their loan papers?
I’m not seeing any reason anyone needs to cut the banks any slack for their lacking forsight when they drew up the contract.
The foreclosure and credit hit are supposed to be penalties.
Since when? Certainly the homeowner would rather avoid them, but they are both designed to protect the bank’s interest, not punish the homeowner.
This is an easily answered question, one that may have variations and nuances depending on jurisdiction, but the basic answer is clearly out there.
After all, banks, financial institutions, and various corporations of every stripe are subject to the laws the OP is asking about. Why else would such a corporate culture of primarily ethical post-contract analysis exist? It’s a shame that consumers are taking such base financial approach to transactions. It’s simply unheard of!
People usually need a place to live, so foreclosing on them hurts them. Now, in cases like I’m talking about where a person willingly walks away, then if it’s a simple matter of the bank, mortgage company, or whoever, reselling the house to make up the rest of what they are owed, then that would be that.
But it turns out that the person also get a bad credit rating. Why is that? Oh yeah, they signed a contract saying they’d pay X amount per month for so many years. Then they stopped paying. They’re not as trustworthy as they once were. If both options were equally valid then there would be no credit hit.
If you told the lender point blank, “If the value of the property drops to lower than what I’ll owe, then I’ll default.” you most likely won’t get the loan. Why is that? After all, defaulting is a just another valid option, right? Or maybe the fact is that when a person signs a loan they are, at least, implying that they will make a good faith effort to pay back the loan.
But that is not the intent of foreclosure; the intent of foreclosure is to reduce the bank’s loss.
The intent of bad credit rating is not to punish the borrower, but to inform future lenders of the risk.
If you have a job interview, and tell your prospective employer, “I will leave this company as soon as I get a better offer,” you probably won’t get the job. But that doesn’t make you a bad person.
No, the OP asked a question about ethics, not the law. Ethical questions are often quite a bit more murky than legal questions, unless maybe you believe that whatever is legal is ethical and whatever is illegal is unethical.
I am continually astounded by the number of people on this board who feel sorry for the poor, innocent, helpless banking industry.
What risk? All the borrower did was choose one of two equally valid options. Why is that risky behavior?
I never said that strategic defaulters are necessarily bad people, just untrustworthy.
Most work (at least here in America) is at will. They can fire you as easily as you can quit. So in those instances it doesn’t make you a “bad person”. If you sign a contract specifying your length of employment and then breach that contract, it may not make you a bad person either, but it most likely will make you less trustworthy.