# Is walking away from your mortgage unethical?

**URL:** <https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169>\
**Category:** Great Debates\
**Created:** [January 8, 2010, 4:07pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169 "2010-01-08T16:07:38Z")\
**Posts on this page:** 15\
**Page:** 5

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**Author:** ![RickJay](https://avatars.discourse-cdn.com/v4/letter/r/bb73d2/32.png) [@RickJay](https://boards.straightdope.com/u/RickJay)\
**Post date:** [January 10, 2010, 8:44pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/81 "2010-01-10T20:44:33Z")

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> [@Kimstu](#):
>
> In terms of their contractual duty to the corporation they work for, corporate directors, as I correctly said, _DO NOT HAVE THE CHOICE_ to pursue a financially disadvantageous course of action just because they think it would be the ethical thing to do

From the very same source:

> [@](#):
>
> "The fiduciary duty held by directors requires them to act with due care, which means that the director must act reasonably to protect the corporation’s best interests. Courts will find a breach of the fiduciary duty when a director engages in self-dealing or NEGLIGENCE.

“Reasonably,” not “absolutely whatever it takes irrespective of ethics.” Your own source also suggests that this case is being neglected if a director engages in self-dealing, e.g. a conflict of interest, or overt negligence. Your own source defines negligence as “conduct expected of a reasonably prudent person,” not “anything it takes to make money ethics be damned.”

Nothing in your cite suggests that “reasonable” means “in defiance of common ethics.”

Can you say with a straight face that a corporate director who acts guided by commonly understood business ethics will face a (non-trivial) lawsuit?

Let’s keep going with your source:

> [@](#):
>
> The roles of corporate officers—typically the corporation’s president, vice presidents, treasurer, and secretary—are defined by the corporate by-laws, articles of incorporation, and statutes.

This would appear to say that corporate bylaws override a mindless drive for profit. So in any event the people wh oset the corporation up can place any ethics clause they want in the bylaws and the shareholders have to suck it up.

Nothing in your cite suggests that “reasonable” means “in defiance of common ethics.”

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**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\
**Post date:** [January 10, 2010, 9:39pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/82 "2010-01-10T21:39:12Z")

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> [@RickJay](#):
>
> This would appear to say that corporate bylaws override a mindless drive for profit. So in any event the people wh oset the corporation up can place any ethics clause they want in the bylaws and the shareholders have to suck it up.
> 
> Nothing in your cite suggests that “reasonable” means “in defiance of common ethics.”

Now you’re moving the goalposts. The question I was addressing was not whether there can be any valid incentives (in the law, in the corporate bylaws, or in the company’s business strategy) for a corporation to uphold certain ethical standards. Of course there can, but that’s not the point.

The question was simply whether a corporate director attempting to fulfill his or her contractual obligations to the company has the choice “to pursue a course of action that will be financially disadvantageous to the corporation, _ **JUST** _ because s/he thinks that course of action would be the most ethical thing to do.” Emphasis added.

Nobody’s claiming that corporations can never do anything ethical, that there’s never a financial incentive for them to do anything ethical, or that they aren’t officially required to follow formal ethics guidelines about things like obeying the law or avoiding conflicts of interest.

All I’m saying—and you can’t reasonably deny it—is that a corporate director’s fiduciary duty to maximize profitability cannot officially be subjugated to his/her personal moral views about what would be the most ethical corporate policy.

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**Author:** ![PBear42](https://avatars.discourse-cdn.com/v4/letter/p/ecccb3/32.png) [@PBear42](https://boards.straightdope.com/u/PBear42)\
**Post date:** [January 11, 2010, 7:38am UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/83 "2010-01-11T07:38:43Z")

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FWIW, several posters have said or implied a mortgage includes a right of the borrower to tender the keys and default the loan. Not so. All loans state a clear, unconditional obligation of the borrower to pay the debt (subject only to bankruptcy law). In the event of default, the mortgage gives the lender a remedy to obtain or sell title to the property. But this a remedy of the lender, not the borrower. As a practical matter, if a borrower defaults, the lender may have no other reasonable option but to take or sell title. (Whether lender has a recourse claim for the deficiency differs by jurisdiction.) OTOH, to say the borrower has a _ **right** _ to default and suffer the consequences is a misstatement of the contract.

How this affects the ethical question I leave to others. But do, let’s please, start from a correct undersanding of the contract.

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**Author:** ![mhendo](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/mhendo/32/3159_2.png) [@mhendo](https://boards.straightdope.com/u/mhendo)\
**Post date:** [January 11, 2010, 5:40pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/84 "2010-01-11T17:40:14Z")

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Just last month, Brent White, a professor of law at the University of Arizona, published a really interesting paper on the exact topic of this thread. The paper is titled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” _Arizona Legal Studies_, Discussion Paper No. 09-35, and is available for download from the [Social Science Research Network](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1494467).

It’s a 54-page paper, but it’s straightforward and easy to read, and i would encourage anyone interested in this issue to take a look at it. White talks about the moral pressure to keep up payments on mortgages in the United States, and makes the argument that many Americans who are still paying their mortgages would be far better off just walking away. A key part of his argument is that:

> [@](#):
>
> the disparity between the norms governing the  
> behavior of individuals and banks has created an imbalance in  
> which individual homeowners have born a disproportionate  
> financial burden from the housing collapse.
> 
> p. 2

He has a rather illuminating hypothetical example, in which he discusses a couple from the town of Salinas, California (badly hit by the mortgage crisis) who bought a home in 2006 for $585,000 (the average price for a 3-bedroom, 1,380 square foot home in Salinas at that time). Their house is now, according to White, worth about $187,000. They are paying $4,300 a month on a house that would currently sell with a mortgage of about $1,200 a month.

> [@](#):
>
> Assuming they intend to stay in their home ten years, Sam  
> and Chris would save approximately $340,000 by walking away,  
> including a monthly savings of at least $1700 on rent verses  
> mortgage payments, even after factoring in the mortgage interest  
> tax reduction. The financial gain for Sam and Chris from walking  
> away would be even more substantial if they took their monthly  
> savings and put it into an investment account. If they stay in their  
> home on the other hand, it will take Sam and Chris over 60 years  
> just to recover their equity – assuming, of course, that they live that  
> long, the market in Salinas has indeed hit bottom, and their home  
> appreciates at the historical appreciation rate of 3.5%.
> 
> p. 10

Fuck me, but that’s some dire situation! I realize that plenty of underwater mortgages are not quite as bad as this particular example, but in this case i would walk away in a heartbeat.

White has quite a bit to say about moral and ethical pressures on homeowners. He recognizes that people invest not only money in their homes, but also emotional capital, and that people often keep up payments because they want a home of their own, and because they see value in the simple fact of being a homeowner. Furthermore,

> [@](#):
>
> people are less likely to default if  
> doing so will make them feel like immoral or irresponsible persons  
> – and are especially unlikely to default if they believe others will  
> think of them as immoral or irresponsible persons.
> 
> p. 20

Section V of his paper, entitled “The Social Control of the Housing Crisis,” talks about how financial institutions, the media, and even the government rely on, and exacerbate these moral qualms in an attempt to get people to keep up payments, even in situations where the people would be far better off simply walking away from their house.

He also talks about how lending institutions’ practices place pressure on people who are having trouble affording their payments. For example, he discusses the response of lenders when borrowers get in touch to try and renegotiate payments. Rather than actually trying to sit down with the borrower to work something out, the lender will often simply stonewall, refusing to communicate and ignoring the borrower’s pleas, because lenders know that most borrowers will do everything they can to make the next payment, even if it means sacrificing something else. The social pressure to avoid default works in the lender’s favor, because the borrower doesn’t want to be seen as a deadbeat, and often doesn’t even realize that walking away might be in his or her own best interest.

White also talks about the lenders’ control over credit scores, arguing:

> [@](#):
>
> A borrower might in fact walk without _legal_  
> penalty, but the lender holds the borrower’s human worth as  
> collateral – and will likely trash it in retaliation for the borrower’s  
> exercise of their contractual right to default. The credit  
> reporting system thus subordinates the law to social norms, and  
> makes it impossible for a strategic defaulter to avoid the  
> reputational penalty of default, - even by packing up and moving  
> across the country. Indeed, for seven years, perfect strangers who  
> access the defaulter’s credit report will learn of the moral misdeed  
> and express their disapproval, if only by changing their tone of  
> voice in the way that individuals tend to do when addressing  
> someone of a lesser social status.
> 
> pp. 34-35

The whole credit system, White says, “operates largely outside legal process as a norm enforcer.”

White places considerable blame on lending institutions who, he says,

> [@](#):
>
> lost sight of the importance of  
> positive equity in lowering the risk of mortgage default, and failed  
> to ensure that homes were actually worth what they were being  
> purchased for.
> 
> p. 37

Central to his position is that, while lenders and other institutions like government place _moral_ pressure on borrowers to keep up with their payments, those same lenders themselves make decisions based only on their own financial interest, and feel no moral obligation to the borrowers outside of what is required by the law and their contracts. White says that

> [@](#):
>
> lenders are simply operating to  
> maximize profit and minimize losses, just as they would be  
> expected to do.
> 
> p. 38

White argues that this results in an “asymmetry of moral norms,” in which borrowers are held by the system to higher moral standards of rectitude than lenders.

> [@](#):
>
> On a fundamental level,  
> the asymmetry of moral norms for borrowers and market norms for  
> lenders gives lenders an unfair advantage in negotiations related to  
> the enforcement of contractual rights and obligations, including the  
> borrower’s right to exercise the _put option_.
> 
> p. 40

He argues that borrowers also need to focus on the economic issues, and do what is in their own best interests, rather than succumbing to the moral pressure exerted by certain institutions and social groups. In short, borrowers need to make the same sorts of cost/benefit analysis as lenders, and need to try and push aside the moral pressures and the social stigma attached to defaulting on their mortgages.

> [@](#):
>
> Once a home has become an  
> albatross instead of an investment, struggling to pay a mortgage  
> makes no financial sense, almost regardless of one’s monthly  
> payment. For many homeowners, technical affordability is not the  
> lone consideration. Relative affordability and negative equity both  
> matter as well – and once negative equity is severe enough, it may  
> overwhelm other considerations.
> 
> p. 42

He also, at the end, offers suggestions for changing public policy practices and laws to make things easier for borrowers. For example:

> [@](#):
>
> Eric Posner and Luigi  
> Zingales have suggested changing federal bankruptcy law to allow  
> “prepackaged,” or streamlined, mortgage cram-downs under  
> Chapter 13 of the Bankruptcy Code. Under Posner and  
> Zingales’ intriguing proposal, any homeowner who lives in a ZIP  
> code where the median home price has dropped by more than 20  
> percent from its peak would have the right to submit a “Chapter 13  
> prepack.” This prepack “would simply contain a new mortgage  
> amount that is equal to the old mortgage amount discounted by the  
> percentage decline of the median house price for the ZIP code.  
> Monthly payments would decline by the same percentage; the term  
> of the mortgage would not be changed.” The creditor would  
> not have the right to oppose the prepack, but would be entitled to a  
> percentage of the home’s appreciate upon sale equal to the  
> percentage reduction in the principal pursuant to the prepack.
> 
> \<snip\>
> 
> At a minimum, however, federally-approved and supported  
> housing and credit counseling agencies should cease in sending the  
> fear-laden message that foreclosure should be avoided at all cost.  
> They should also provide accurate information – including that  
> defaulting homeowners face no risk of a deficiency judgment in  
> many states or, regardless of the state, for FHA loans or loans  
> held by Fannie Mae or Freddie Mac; there is currently no tax  
> liability on “forgiven portions” of home mortgages; and most  
> people can expect to recover from the negative impact of  
> foreclosure on their credit score within a two years.
> 
> \<snip\>
> 
> One such solution, for example, would be to amend the Fair Credit  
> Reporting Act to prevent lenders from reporting mortgage defaults  
> and foreclosures to credit rating agencies.
> 
> \<snip\>
> 
> The suggestion that Congress should amend the Fair Credit  
> Reporting Act to prevent lenders from reporting mortgage defaults  
> is premised upon the underlying mortgage contract, in which  
> lenders agree to hold the house alone as collateral. In the case of  
> underwater mortgages, however, the portion of the mortgage above  
> the home’s present value essentially becomes unsecured. Lenders  
> compensate for this by holding the borrowers’ credit score, and  
> thus their human worth, as collateral – thereby altering the  
> underlining agreement that the home serves as the sole collateral.  
> As a consequence, lenders are often able to reap the benefit, but  
> escape the costs, of their bargain.
> 
> pp. 43-45

White concludes his paper:

> [@](#):
>
> The current housing bust should be viewed  
> for what it is: a market failure – not a moral failure on the part of  
> American homeowners. That being the case, it is time to take  
> morals out of the picture and search for an equitable solution to the  
> negative equity problem.
> 
> p. 52

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<div class="post-metadata">

**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\
**Post date:** [January 11, 2010, 6:08pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/85 "2010-01-11T18:08:46Z")

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Thanks, **mhendo** , that was interesting.

There is another dimension I haven’t seen so far. The fed are trying to encourage the banks to renegotiate loans and principal to reduce the number of foreclosures. The banks have been resisting. Given the fall in house values as illustrated in the cited article, bank officers that play hardball with borrowers who then walk away are losing a lot of money for their banks. If they renegotiated to make the principal say $350K instead of $530K. they would write off $180 K instead of $350K. If ethics for companies involves maximizing shareholder value, the bank officers are not acting ethically.  
This may be due to loss aversion, or it may be due to the fact that the ownership of the loan is spread out so much that it is easier to declare it bad when people walk away than to get agreement on renegotiating to reduce the loss. Just another example of how the system is broken.

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**Author:** ![toadspittle](https://avatars.discourse-cdn.com/v4/letter/t/c0e974/32.png) [@toadspittle](https://boards.straightdope.com/u/toadspittle)\
**Post date:** [January 11, 2010, 9:22pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/86 "2010-01-11T21:22:01Z")

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Wow. Helluva post, mhendo.

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**Author:** ![mhendo](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/mhendo/32/3159_2.png) [@mhendo](https://boards.straightdope.com/u/mhendo)\
**Post date:** [January 25, 2010, 6:59pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/87 "2010-01-25T18:59:49Z")

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This thread’s only been dormant a couple of weeks, so i thought this might be of interest. If anyone wonders how corporate America makes decisions about underwater mortgages, or their commercial big-business equivalent, they should read [this story](http://online.wsj.com/article/SB10001424052748703415804575023483097973538.html?mod=WSJ_Real+Estate_RIGHTTopCarousel) in today’s _Wall Streeet Journal_.

> [@](#):
>
> A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom.
> 
> \<snip\>
> 
> The property’s owners signaled they would be unable to reach a deal with lenders and instead decided to allow creditors to proceed with what amounts to an orderly deed-in-lieu of foreclosure, which means a borrower voluntarily gives the property back to lenders to avoid a foreclosure proceeding.

So, Tishman Speyer and their partners paid $5.4 billion for this property, it’s now only worth about $1.8 billion, so they’re essentially stopping payment on the mortgage and handing the keys over to the bank.

Remember this next time some financial industry asshole tries to make a homeowner feel guilty for walking away from an upside-down mortgage.  
ETA:

By the way, if you’re a California state employee with an interest in the California Public Employees’ Retirement System (like my wife), you’ll also be happy to know that CalPERS was a substantial equity investor in this deal, and is likely to lose most, perhaps all, of its investment. Just what the California state system needs right now!

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**Author:** ![boytyperanma](https://avatars.discourse-cdn.com/v4/letter/b/4491bb/32.png) [@boytyperanma](https://boards.straightdope.com/u/boytyperanma)\
**Post date:** [January 25, 2010, 8:31pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/88 "2010-01-25T20:31:37Z")

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> [@mhendo](#):
>
> So, Tishman Speyer and their partners paid $5.4 billion for this property, it’s now only worth about $1.8 billion, so they’re essentially stopping payment on the mortgage and handing the keys over to the bank.
> 
> Remember this next time some financial industry asshole tries to make a homeowner feel guilty for walking away from an upside-down mortgage.

They even got special treatment for doing so.

In many cases homeowners are being put through the ringer trying to settle to a voluntary foreclosure. In the case mentioned the property owners said hey we can’t/aren’t going to pay the mortgage. The banks response was well that sucks, but we’ll take the keys and you walk away, releaving the property owner of basic responsibilities like maintenance winterization taxes ect.

In the case of many homeowners the response from the bank is ‘no we will not take your keys.’ They are stuck with the responsibility till the bank gets around to foreclose. Meanwhile the homeowner is in credit limbo and unable to even move forward with a bankruptcy because the bank is taking over year to handle the debt.

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**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\
**Post date:** [January 25, 2010, 8:51pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/89 "2010-01-25T20:51:17Z")

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One more thing I read about in an article about this. In California (and some other states) only your property is at risk when you walk away, no other assets. The article noted that closing costs were higher on average in California and some other states because of this. Which is reasonable - but it means that Californians are already paying a fee for the ability to walk away. That makes it even more permissible.

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**Author:** ![mhendo](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/mhendo/32/3159_2.png) [@mhendo](https://boards.straightdope.com/u/mhendo)\
**Post date:** [January 25, 2010, 9:04pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/90 "2010-01-25T21:04:38Z")

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> [@Voyager](#):
>
> One more thing I read about in an article about this. In California (and some other states) only your property is at risk when you walk away, no other assets. The article noted that closing costs were higher on average in California and some other states because of this. Which is reasonable - but it means that Californians are already paying a fee for the ability to walk away. That makes it even more permissible.

Yep, the article i cited a few posts back talks specifically about this. White notes that states like California and Arizona are “non-recourse states” where, as you say, the law allows the creditor only to take the property, and not to seek any deficiency judgment against the defaulter.

There are about a dozen states with such anti-deficiency or non-recourse statutes, and there are a handful more that only allow the lend to take one stab (a single action) at recovering their money. It’s worth noting, though, that some non-recourse states also have some other stipulations. For example, i believe that in California, the only part of the loan subject to non-recourse provisions is the original amount used to purchase the house. If you have taken out a home equity loan, or used some other instrument to leverage the value of your home in exchange for cash, you can be sued for that amount.

It’s not quite clear to me how this all works out, in practice, in the states that do NOT have non-recourse provisions. Presumably, if you default on your mortgage in such a jurisdiction, you would probably also need to declare bankruptcy in order to avoid being on the hook for the deficient amount of the loan. In a non-recourse state, on the other hand, you can presumably default on the mortgage without declaring bankruptcy.

If i’m wrong about this, and anyone has a better understanding of how it works, i’d appreciate some input.

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**Author:** ![LurkerInNJ](https://avatars.discourse-cdn.com/v4/letter/l/ed655f/32.png) [@LurkerInNJ](https://boards.straightdope.com/u/LurkerInNJ)\
**Post date:** [January 25, 2010, 11:33pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/91 "2010-01-25T23:33:21Z")

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> [@mack](#):
>
> Does anybody know what happened next? Can a person in this case keep the house and continue not paying the mortgage consequence-free?

No. The lender will make sure the proper assignments are filed.

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**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\
**Post date:** [January 25, 2010, 11:56pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/92 "2010-01-25T23:56:31Z")

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> [@LurkerInNJ](#):
>
> No. The lender will make sure the proper assignments are filed.

The lender might the first time the loan is sold, but when the chunks are sold many times after that it appears that some corners were cut.

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**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\
**Post date:** [January 25, 2010, 11:59pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/93 "2010-01-25T23:59:36Z")

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> [@mhendo](#):
>
> It’s not quite clear to me how this all works out, in practice, in the states that do NOT have non-recourse provisions. Presumably, if you default on your mortgage in such a jurisdiction, you would probably also need to declare bankruptcy in order to avoid being on the hook for the deficient amount of the loan. In a non-recourse state, on the other hand, you can presumably default on the mortgage without declaring bankruptcy.
> 
> If i’m wrong about this, and anyone has a better understanding of how it works, i’d appreciate some input.

I can’t answer, but I moved out of Louisiana in 1980, just before the housing market there collapsed due to an oil bust and high interest rates. I know of several people who walked away from their mortgages and moved out of state, and never heard any consequences in terms of anyone coming after other assets. However Louisiana has a law unto itself, so it might not be the best example. Similar stuff happened around Houston, but I only saw the news stories about that.

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**Author:** ![Dick\_Dastardly](https://avatars.discourse-cdn.com/v4/letter/d/c4cdca/32.png) [@Dick\_Dastardly](https://boards.straightdope.com/u/Dick_Dastardly)\
**Post date:** [January 26, 2010, 12:09am UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/94 "2010-01-26T00:09:19Z")

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EDIT: wrong post. 🙂

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**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\
**Post date:** [January 26, 2010, 3:17pm UTC](https://boards.straightdope.com/t/is-walking-away-from-your-mortgage-unethical/524169/95 "2010-01-26T15:17:05Z")

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[Don't Look Back: Major Players Continue To 'Walk Away' From Poor Mortgages | HuffPost Impact](http://www.huffingtonpost.com/2010/01/25/dont-look-back-major-play_n_435965.html) Here are examples of corporations walking when the land deal went upside down. But since we love the idea that corporations are not supposed to have a conscience , their walking away will not have social consequences. But we can castigate people who wind up in the same spot.  
If it is just a wise business decision for a corp. to walk, then it is for a homeowner too. The real key is redoing mortgages to keep people in their homes. The banksters don’t want to do that.

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