Let me ask you a question: Do you know, or do you have reason to believe, that banks have changed their mortgage contracts to address people making strategic defaults?
I mean, let’s go under the wild speculation that banks were caught unawares and completely gobsmacked that a borrower would just voluntarily walk away from a mortgage. “How could they? How would they?” the bankers murmur to each other. “I thought we trusted one another. Never in my 40 years in this industry and in the 257 years this banking institution has been open, have I ever seen anything so callous and reckless as this!”
So what would they do? 1) Change the terms of the contract, or, failing the ability to do that 2) lobby Congress for the ability to do so.
That would seem natural right?
Or they could keep on keeping on, accepting that an occassional strategic default is part of the cost of doing business. In fact, I wouldn’t be terribly surprised it x% of strategic defaults were already built into their lending business model that allowed them to loan out to so many people while still remaining profitable.
Banks KNOW some people will walk away and they accept this. If they didn’t, they’d change the rules or get out of the business altogether. But they don’t. Instead it’s written into contracts as just one of the ways to end a business relationship.
The bottom line is this: banks literally write the contracts that say it’s OK to make a strategic default. So who are you to say otherwise?
You might not like to hear this from me, but I started out reading these threads with a nebulous “people shouldn’t walk away from a mortgage” thought, just you.
The more threads I read on the topic, the more I concluded, “Yes, it is appropriate to do so in some circumstances, so long as they live up to the contract and allow the foreclosure (or even facilitate it).”
So mark me down as someone whose position changed by reading these threads and considering the opposing arguments - but changed away from your position towards that of the people arguing the other side.
But here is a problem - implied intent of a contract is a tricky thing. Once you start moving away from the written, express terms of a contract and into implied intent, it becomes much more difficult to agree after the fact what the implied intent was - and it depends on the implied intent of the parties to each contract, which could be different with each contract.
So for example, if it was your mortgage that was in issue, based on your position in this thread, I think it would be pretty straightforward to say that your implied intent was that you wouldn’t walk away so long as you could afford the payments.
But based on the comments of others in this thread, it’s not at all clear that they would have had that implied intent - and some posters have denied that they would have any such implied intent.
I don’t think it’s possible for you to project your implied intent to all other mortgages, and say it’s an implied term of those contracts, which is what you seem to be doing.
People have been using the term “bad faith” incorrectly. If I took out a loan with a period of negative amortization (paying less then the interest) with the intent to live in a better house than I could afford and then walk away when the payments went up, I would be acting in bad faith. If I signed my contract fully intending to make payments until I either paid it off or sold the house, then latter changed my mind and walked away, I did not act in bad faith.
Second point: There are two ways to get out of the contract. One is to stop paying money and lose the property. The second is to pay off early. This also involves a loss of revenue to the loan holder. Does that make refinancing immoral? What about paying a little extra each month? If you get an interest only loan and you pay down some of the principle, is that an immoral act. Note that there are sometimes penalties involved with pre-payment.
There are also other ways you can incur penalties on a mortgage contract. In some states if you get a mortgage on your residence and later rent it out, you incur penalties. Should that be considered unethical?
The point here is if intentionally incurring pre-defined penalties built into a contract when you could choose not to is not ethical for one clause, but is ethical for another, why? What is so special about the foreclosure option?
Third point:
It is rather rare to be in a situation where a homeowner will be better off doing this. You need to be really underwater for this to be worth doing. If you owe 105% of your current house value, walking away would be foolish because buying a house costs at least 106% of the house value (due to commissions) even without taxes. You wold really need to be in a situation where your house has fallen by more than 30% and to have had no equity for it to start to make sense.
In my opinion the real reason for this push by the industry is to increase the social guilt on struggling homeowners to keep paying even if it means gutting their retirements and not paying other debts.
Also, it should be reiterated that one of the biggest pushers of the idea that is immoral or unethical for home owners to walk away from loans just walked away from their own loan. For ethics to work, they must be both reciprocal and apply to all. Otherwise it is just a con.
But why is it “sinking down to their level”? What “level”?
What about 2-year cell phone contracts? Is the intent for the consumer to lock himself into the contract for the entire contract? He buys a (subsidized) Blackberry with a 2-year contract but sees a new iPhone 1 year into his existing contract. Yes, there’s a “penalty clause” and he would have to pay extra money to break the contract. However, he should simply delay his iPhone purchase because he’s a “gentleman” and gentleman abide by the “intent” of the contract since he can still “afford” to finish the original 2-year term.
What about leases of apartments? People break leases early all the time. The “intent” of the lease is to live there through the entire term of the lease.
My guess is that they keep things the way they are so that they can hypocritically strategically default on loans if they want to, while trying to shame individuals who do the same thing.
And as for who I am, I am a human being with a right to my own opinion.
I have no problem with you changing your mind against my position. I guess you proved me wrong about people changing their minds. Thanks a lot pal!:mad:
But seriously, I guess I’m the only one who feels this way. No biggie.
Like I said earlier, I think lenders keep things the way they are, so that they can walk away too if they want. Which of course makes them hypocrites when they get upset with individuals who do the same thing.
It’s not so much not having a problem with it, it’s a matter of playing on a level field. A person who is going to operate on a high moral level with their dealings is, on average, going to get screwed over by the corporations who aren’t operating morally at all.
It’s not even deliberate on the corporation’s part. The corporation has one group setting up the deal, another group writing up the contractual language, a third group handling the ongoing relationship, and a fourth group dealing with problems. Nobody in those groups has a personal relationship with the customer, nor do they have the ability to give you much slack when you violate the contract’s terms.
When things go south, the moral actor gets clobbered by the amoral actor who is operates strictly by the terms of the contract.
In terms of why the banks leave it the way it is, in some cases it wouldn’t surprise me that they are simply not allowed to make it harder to walk away, and live with it as a cost of doing business in that state.
I think this is it exactly. Banks ultimately created this problem by treating their customers like dirt and trying to squeeze every last cent of profit out of them. We all might be slightly more inclined to view the relationship as anything other than a strict business relationship had the banks not been playing ridiculously exploitave games with overdraft fees, atm fees, minimum balance requirements, etc.
In a way, it’s a lot like the situation with the record industry. If you treat your customers like cows to be milked for every cent, when the opportunity to reverse the situation occurs, people take advantage of it.
Bottom line is, one party really can’t blame the other side for making cold business decisions when that party was the one that created that culture in the first place.
It’s already been said several times, but the mortgage contract is a financial arrangement, not a moral arrangement. The bank is agreeing to lend me money to purchase a house. By lending money, they assume a risk that I will not pay that money back. To offset that risk, they charge interest greater than the (anticipated) inflation rate. If they were to try and reduce the risk of a strategic default, I would demand a significantly lower interest rate.
It’s not moral. It’s financial, risk management, and contractual.
If you have a mortgage and do not pay, what happens? They take the house back. That too is the contract. So you quit paying and they take it back. The contract is biding.
The bank could also require a personal guaranty. If you stop paying they take the house back and sell it. If there is a shortfall between the value of the house and the amount of the mortgage, they look to the borrower to make up the difference by calling the guaranty.
Most home financings have historically not included a personal guaranty…but that could change.
As has been pointed out, that is a state by state distinction. In California, where I live, they cannot legally ask for more than the secured property. But even if they can, so what? That only affects the financial calculation. And it still may be worth it in rare situations. It is unlikely that they can force you to pay more than enough to make up the principle. If you have a high enough interest rate it might make sense to get out of the loan even if you have to pay off the whole thing. Of course a better option in that case is to try a short sale. But if the bank won’t accept that and you can’t clear the lien any other way, then turning in the keys and accepting the penalties may be the way to go.
I believe you are mistaken. Where’s the cite? A bank when issuing new financing in California or otherwise cannot be legally precluded from requiring a personal guarantee from the borrower. The State cannot require a bank to lower its underwriting criteria.
With a personal guarantee in place, a borrower with financial means has less incentive to walk away from a loan that is underwater, as the bank is going to turn to the borrower for full repayment of the loan not just to the proceeds from the collateral sale.
So, as long as one is aware of and freely accepts the consequences, no act should be considered immoral?
Or, as long as the entity one screws over has made a habit of screwing others over, one’s actions are not immoral?
If I repay more loan early, the bank (or security holder) loses money. Is that immoral? If I quit my job, I no longer get paid. Is that immoral? Having consequences does not make something moral or immoral.
I could see taking out mortgages with the intent to walk away as immoral. But what moral concept is being violated in these incidents? You agree to do this or that and choose the that option. Why is that immoral?
That’s referring to the mortgage. There’s nothing precluding the bank also requiring a guarantee from the borrower **in addition to **the mortgage. :rolleyes:
Actually, I believe there is. I actually consulted an attorney about this once when I had a personal mortgage (seller financed loan). In California, you can either have a mortgage with a lien on the property, or you can have a guarantee of payment, not both (subject to the restrictions above). If the lender does a non-judicial foreclosure on purchasing loan for owner occupied home, they cannot seek additional funds from the borrower.
