Is walking away from your mortgage unethical?

[Rumor_Watkins]

Better question:

is it unethical to either stop paying your mortgage on a house with an eye towards staying in your house for the duration of a foreclosure action (which can take a long time)

or attempting to defeat your lienholder’s attempt to eject you from your property by forcing them to demonstrate the existence of a valid security agreement (which, depending on how much the lender has his shit together, may be difficult for them to do)
IMO, these tactics are of far greater ethical concern, and more ripe for discussion.

[Rumor_Watkins]

@Rafe_Hollister

Walking away from a mortgage is not unethical; it’s just stupid. However, there are other options. The short sale was mentioned and it is a reasonable alternative due to depressed home values and income reduction or the requirement to move. If you simply walk away, the home will be foreclosed and sold to the highest bidder. Then it is GUARANTEED that you will be sued if the home brings less than the mortgage balance. Also, if the home brings more than the balance, the mortgage company will not send you a check for the excess proceeds. Yeah. It’s dumb.

I don’t think this is guaranteed. At all. To get deficiency judgments, you typically have to have all your i’s dotted and t’s crossed. Besides, the costs of these things can easily outweigh the expected deficiency

[Rafe_Hollister]

Rumor,

That may or may not be true. The deficiency can be sold to debt collectors and you will be legally liable for it. It may not pop up for years, but it is still owed by the mortgagee. Nobody should take the chance.

[Kearsen]

@Rumor_Watkins

Better question:

is it unethical to either stop paying your mortgage on a house with an eye towards staying in your house for the duration of a foreclosure action (which can take a long time)

or attempting to defeat your lienholder’s attempt to eject you from your property by forcing them to demonstrate the existence of a valid security agreement (which, depending on how much the lender has his shit together, may be difficult for them to do)
IMO, these tactics are of far greater ethical concern, and more ripe for discussion.

In this case, I think it would depend on the long term goal. Are you going to file bankruptcy? (in which case you’d keep the house anyway) If you aren’t going to or don’t want to file bankruptcy then I’d agree that it might be an unethical position to take.
The kicker being, it may be unethical but a good sound business decision. The terms of the foreclosure et al are agreed upon in the contract you sign with the bank.
Forcing them to remove you from the house because it is strict ‘letter of the law’ under the contract isn’t being unethical.

Using a renter in lieu of a lienholder would grant you more opportunity to explore the ethical position. If a renter stays in the house after you have given sufficient notice to vacate and then forces you to have the authorities remove him/her.

[Voyager]

@Kimstu

I think Euphonious Polemic clearly meant the former. Individuals who are influential in determining corporate policy have varying standards of morality, but corporations themselves have no intrinsic moral capacity. They aren’t built for it.

Many corporations have codes of conduct and guiding principles, which might be considered a corporate ethical standard. However I agree with you, in that I don’t think there is an difference in written standards between a company like Enron and companies who actually behave ethically. A corporation is obligated to its shareholders, who may or many not care about ethics.

Three words: do no evil.

[The_Second_Stone]

@Palo_Verde

I still think it’s unethical. Playing the “But everyone else is doing it” card sounds something like my 12 year old would say.

You are responsible for your own ethics, and how others behave should not affect that. When you make an agreement, you have the ethical responsibility to live up to that agreement to the best of your ability.

That boils down to what is ethics? Compare it to law or morality, which do not depend on what everybody else does. Ethics are about customary business practices in this context: it is unethical to send a post-dated check (illegal too) even if the bank waits to cash it. Why would it be unethical to default deliberately when the contract and the law go into great detail on the process of what happens to such a default. It is agreed in writing that a default will have the specified remedies. In most states the bank cannot then seek a judgment for the deficiency: that is part of the contract that they put forth according to what the laws allowed, the owner was not allowed to negotiate any of these terms. How can it be unethical for the owner to use the option of the default provisions that the parties agreed on?

[RickJay]

@Capt.Ridley_s_Shooting_Party

You have no ethical responsibility toward big business.

This logically means that you have no responsibility not to shoplift, rob banks, or embezzle. And people who’re willling to steal havea way of defining all business as “big business.” A decent human being always has a responsibility to be ethical in all their dealings. If you can’t be trusted no to steal from BigCorp, then I don’t trust you not to steal from me.

However, with respect to a mortgage, your ethical responsibilities are defined by the mortgage contract. If the contract says you can default, but that the bank gets the property and you take whatever hit to your credit rating that entails, then that’s what the contract says. It’s not unethical to choose an option that is specifically mapped out in the contract, and the bank can hardly claim otherwise.

[Voyager]

@Rumor_Watkins

Better question:

is it unethical to either stop paying your mortgage on a house with an eye towards staying in your house for the duration of a foreclosure action (which can take a long time)

As opposed to what? If for some reason you can’t pay, I’d argue that you staying in your house until the bitter end is actually a win for the bank, since you are more likely to keep it up and it is less likely to be vandalized than it would be if you left.
If you know you are going to not be able to pay, then stopping right away might make sense in that you are not throwing good money after bad.

or attempting to defeat your lienholder’s attempt to eject you from your property by forcing them to demonstrate the existence of a valid security agreement (which, depending on how much the lender has his shit together, may be difficult for them to do)

Do you mean cases where the supposed lienholder is unable to prove who if anyone now has legal ownership of the loan, and where a judge basically canceled it?

That is perfectly ethical, for a couple of reasons. One, if the lienholder cannot prove ownership, perhaps they do not own the loan. If you pay them, then you are ripping off the entity with legal ownership.

Second, our society and our economy runs in part on accurate information. If a bank has decided to cut corners by firing the people who filed this paperwork to increase their profits, they should accept the risk that it will backfire. Having them lose this asset is an inevitable consequence of their lack of proper controls. I think these days the banks are doing a terrible job of risk management, and this would be a low cost way to teach them a lesson.

I don’t think anyone starts off trying to get out of their mortgage in this way, but if someone is foreclosing on you, I don’t see an issue with requiring the claimed owner of your loan to prove that they are the actual owner.

[yorick73]

@Kearsen

I’m not really advocating doing anything, however I am delving into the “ethical” debate and the reasons for it. Everyone stating the banks are purely unethical are right in that they are going to make decisions on the bottom line.

If the house was really worth $750k and they wanted to walk away from it, they’d just sell the house (in a perfect world), pay the debt and walk away with the $250k in their pocket.

However the fluctuations in the value of property may be such that, what was once worth $750 is now worth a measly $250k. In this scenario (if it was a bank), they’d walk on the note.

My question is if it was strictly a value v value scenario why do banks need to tie “credit rating” to their loan at all. Either the loan is a good investment on it’s own or it isn’t.

Good investment for a bank means that they believe you will not walk away from your responsibilities regardless of what the value of the house becomes. Remember, they are not in the business of selling houses so, even if the house is worth more than the loan, they much prefer you pay back the loan than give them the house. Credit rating is, of course, partly an assessment of risk that you will walk away. If you have chosen to pay your credit cards and car loans in a timely manner then there is a good possibility that you will pay your mortgage on time.

[otternell]

@RickJay

This logically means that you have no responsibility not to shoplift, rob banks, or embezzle. And people who’re willling to steal havea way of defining all business as “big business.” A decent human being always has a responsibility to be ethical in all their dealings. If you can’t be trusted no to steal from BigCorp, then I don’t trust you not to steal from me.

However, with respect to a mortgage, your ethical responsibilities are defined by the mortgage contract. If the contract says you can default, but that the bank gets the property and you take whatever hit to your credit rating that entails, then that’s what the contract says. It’s not unethical to choose an option that is specifically mapped out in the contract, and the bank can hardly claim otherwise.

Bolding mine: let’s see: illegal, illegal, and illegal. So these don’t really apply to the matter of pure ethics. BTW - I definitely agree with your second paragraph.

[shiftless]

Considering that when I bought my first home I was required to buy mortgage insurance, which protects the bank in case I default, I just can’t understand the feeling that we are duty bound to make payments no matter what. Business is business and if it ain’t covered in the contract it’s not part of the deal. If the poor banks are finding themselves hoodwinked by those crafty homeowners then they might want to change their contracts, find another business and/or take huge amounts of free money from the government.

[MOIDALIZE]

Not only is it not unethical, it’s precisely the medicine our economy needs to swallow to move on. Right now we’re still operating under the belief that if we just hold out long enough we’ll be able to realize some small profit on all these mortgage investments. It’s paper prosperity. If home owners would start evaluating their mortgage situations rationally and started walking away from these bad loans, banks would either have to eat them or start renegotiating the loans, the economy would finally find its floor, and lenders would probably have to write this whole period off as one big societal mulligan in evaluating individual creditworthiness.

[otternell]

@MOIDALIZE

Not only is it not unethical, it’s precisely the medicine our economy needs to swallow to move on. Right now we’re still operating under the belief that if we just hold out long enough we’ll be able to realize some small profit on all these mortgage investments. It’s paper prosperity. If home owners would start evaluating their mortgage situations rationally and started walking away from these bad loans, banks would either have to eat them or start renegotiating the loans, the economy would finally find its floor, and lenders would probably have to write this whole period off as one big societal mulligan in evaluating individual creditworthiness.

Bolding mine.

I sure hope I get some kind of advance notice on the mulligan, I want to get into some shenanigans!

[Euphonious_Polemic]

@Kimstu

I think Euphonious Polemic clearly meant the former. Individuals who are influential in determining corporate policy have varying standards of morality, but corporations themselves have no intrinsic moral capacity. They aren’t built for it.

Yes, exactly. The only reason for a corporation to exist is to make money. As much money as possible. There may be internal “rules” or “guidelines of ethical behaviour”, but these are in place only inasmuch as they can make more money for the corporation. They are not there because they constitute a “good” to society.

In order to fulfill their goal of making money, a corporation may follow the laws of a company, but not necessarily. For example, if breaking a law will lead to a $100,000 profit and a $10,000 fine, then a corporation will break the law, internal “guidelines” be damned. There are no morals in a corporation. Individuals who may try to impose their own moral system on a corporation will be swiftly dealt with by demotion, firing, or isolation.

[CJJ]

@RickJay

…with respect to a mortgage, your ethical responsibilities are defined by the mortgage contract. If the contract says you can default, but that the bank gets the property and you take whatever hit to your credit rating that entails, then that’s what the contract says. It’s not unethical to choose an option that is specifically mapped out in the contract, and the bank can hardly claim otherwise.

Let me be clear that I have no problem with homeowners ditching their mortgage when they’re underwater–at least I don’t think ethics should have anything to do with the decision. However, I think the question is worth examining a bit more, since the above quote could be misinterpreted to mean that once a legal contract is established between two parties, that fact alone negates any ethics surrounding the transaction.

Suppose relatives or friends loaned me some cash to purchase a big ticket item with the expressed wish that the money be paid back but not an enforceable legal contract (e.g. the terms of repayment were vague–“we’ll set up something when you get back on your feet”–or the debtor has a solid belief that the lender will not make a serious legal effort to recoup the funds). I think most folks would consider it unethical to stiff the (admittedly naive) lender, and that I would be taking advantage of the relative/friend who loaned me the money.

Now suppose you have the exact same same situation, except my friend/relative has smartly written out the terms of the loan and included a clause which states that if I failed to meet my obligation I’d have to surrender the big ticket item. I decide to exercise this clause, stop payment, and surrender the item. Assume this is perfectly legal (i.e. there is no possible penalty to me other than loss of the property and hard feelings)–is it still ethical? I would answer “No”, and I suspect many others would do the same; to put it bluntly, it’s a little tougher to screw over someone with whom you already have an ethical relationship, even if this particular obligation is purely a legal one

To me, the key point in the article is that the loan itself is often chopped up and resold dozens of times. This I think contributes to the feeling that the connection between the lender and debtor is purely a financial/legal obligation; the only ethics that can come into play here regard the impact to society in general (e.g. does such an action contribute to a general decay in all kinds of ethical actions?). Ethics, it seems, is fueled by an empathy for one’s fellow man, and corporations have done such a good job of isolating themselves from their customers that they shouldn’t be surprised when these same customers embrace traditionally “unethical” behavior. In fact I doubt they are surprised; I’d bet their attempt to play the ethics card is similar to a football coach calling timeout in the waning seconds of a game when the other team is attempting an easy game-winning field goal–as feeble as it is, it’s the only move you can make.

[md2000]

I’ll agree that - if the terms of extricating yourself from the mortgage are spelled out in the loan agreement, and one option is “turning in the keys”, then it’s ethical.

however, as others have pointed out - in many jurisdictions, if you are foreclosed on, likely your agreement and state law allows the bank to sue you for the difference or sell that liability to a third party who will then harass you. In that case, you have traded “a property and a debt” for “no property, rent payments, and a less definite and smaller debt”. Depending on what rents are in your neighbourhood, this may or may not be a financially sound move.

Is it ethical? IMHO - Depends how you play it out. Legal does not equal ethical, just ask a lawyer… Ethical suggests you notify anyone who has played fair with you up to now, what your intentions and plans are. I would suggest that it IS ethical to retaliate, to not be forthright with those who do not treat you ethically.

However, in general, if you plan to turn in the keys, tell the bank so rather than letting them send unanswered letters for a few months’ free rent until the process reaches foreclosure. Exploiting a loophole to get free use of a house you should and could be paying for, is unethical.

I would argue ethic turns on intent too, IMHO. For example, buying something to use for a week or two then returning it is unethical - if you intended to do so. Buying something, finding that is not what you wanted and does not do what you expected (even though it is not defective) is ethical and something many people do normally. Using that item heavily then returning is not ethical. Using the item to truly see if it satisfactory, then stop using it once you determine it is unsatisfactory, and then returning it, is ethical. The key is intent; only you know your intent, so ethics is internal. In all above examples the action is legal if the merchant has a return policty.

And yes, the world is full of @$$h**es who take a free ride on the fact that merchants allow this crap and most people are too honest to exploit the loopholes.

[otternell]

I’m gonna be consistent: if turning the collateral over is written into a contract, then exercising that option does not have an ethical dimension. Whether or not the person would think you’re a jerk and never want to be your friend again because you took a hardnosed business stance in a personal situation is different. (IMHO) (replying to CJJ*)

[Kimstu]

@Kearsen

As someone extrapolated upthread somewhere, sometimes corporations must make a ‘bottom line’ decision, this does not equate to an ethical position.

@Euphonious Polemic

The only reason for a corporation to exist is to make money. As much money as possible.

Correct, more or less:

Private corporations exist to make money for their investors and owners. […] A public corporation exists to make a profit, but it is distinguishable because it has a large number of investors known as shareholders. […]

Directors […] have a FIDUCIARY duty to act in the best interests of the corporation. These fiduciary duties require the directors to act with care toward the corporation, to act with loyalty toward the corporation, and to act within the confines of the law. A director who breaches this fiduciary duty may be sued by the shareholders and held personally liable for damages to the corporation.

So while it’s not literally true that a corporation is formally obliged by the terms of its charter to break the law if the profit will justify the expense, the fiduciary duty to maximize profit does override pretty much all other considerations (and in practice, it frequently overrides considerations of legality too).

A corporate director or executive simply does not have 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.

[Tom_Tildrum]

@otternell

They are punishing you (generic you of course) because they don’t want to be stuck with real estate, and are hoping that the threat of that punishment is sufficient to keep you in your place paying your bills, regardless of whether it makes sense for you to do so.

Just because they are trying to hold us captive to the idea of “ethics” does not mean that you cannot act in accordance with the contract.

But presumably I’m walking away from the property because I don’t want to be stuck with real estate. Why is the bank’s credit-reporting of my default a punishment and not just an invocation of its legal rights? In other words, why does the bank’s action in response to my default have ethical consequences if my default does not?

@RickJay

This logically means that you have no responsibility not to shoplift, rob banks, or embezzle.

@otternell

Bolding mine: let’s see: illegal, illegal, and illegal. So these don’t really apply to the matter of pure ethics.

But society has an established legal framework to deal with shoplifting, bank robbery, and embezzlement, just like my mortgage agreement has an established legal framework for dealing with default. Why does obliging the target of my embezzlement to pursue legal remedies against me have an ethical component, while obliging the holder of my mortgage to pursue legal remedies against me does not?

[E72521]

Maybe defaulting on a mortgage is ethical, but leaving your neighbors with an eyesore that diminishes the value of their hard work, isn’t. People used to care about shit like that. We’re doomed.