“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:
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.
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.
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.
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:
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.
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,
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:
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,
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
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.
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.
He also, at the end, offers suggestions for changing public policy practices and laws to make things easier for borrowers. For example:
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.
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 in today’s Wall Streeet Journal.
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!
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.
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.
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.
Don't Look Back: Major Players Continue To 'Walk Away' From Poor Mortgages | HuffPost Impact 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.
