I don’t have a specific cite since I am refering to a TV news clip I saw this morning, but a Google search will provide enough references to what I’m referring to.
Basically, a number of homeowners are electing to walk away from their homes and allowing the banks to foreclose on them instead of continuing to pay their mortgage. For the most part, these are people who can afford to make their payments, they are simply electing not to because the value of the house has declined so much that it is no longer a good investment.
Often, these are second homes or investment properties so the borrower is not as concerned about the effect on their credit rating.
I listened to a 60 Minutes podcast recently about the subprime collapse and its effects, and at one point they interviewed a couple who had (or were about to) do just what you describe. The reporter asked if they hadn’t signed a contract agreeing to pay when they took out the mortgage, and the woman replied “yeah, but that was when the home value was going up!”
I have no particular love for mortgage companies or banks, but that attitude does strike me as unethical, and even somewhat childish— I would never personally consider abandoning a debt unless I had no other alternative. When I agree to pay something, I make every effort to pay it. (Maybe that’s why I’m not rich.)
While it does seem pretty scummy, it’s a business deal. If the ongoing business relationship is no longer beneficial to you, it’s smart to end the relationship according to the terms of the contract.
It’s not as though the bank couldn’t do an honest appraisal of the asset being purchased, in fact they probably have better resources for the appraisal than the buyer does. The bank also has intimate knowledge of the various foreclosure and bankruptcy laws, prior to the agreement, and knows this particular outcome is possible. The bank had all the money, and the ability to say no, they chose to say yes, and risk their money on this deal, based on the ever increasing value of real estate.
The bank took on some risk itself - it knew up front that there was a possibility of having to take possession of the property and sell at a loss, and that risk was included in the interet and other terms of the loan. Where’s the immorality?
Yep, it’s a business deal, and I’d expect that banks would plan for a certain percentage of walk-aways, and have reserves in place for the eventuality.
Still, it seems a shady thing for the borrower to do. They have sufficient information when deals are closed to know that the value of assets could go down (even if it seems unlikely at the time).
I was under the impression that many mortgages require the purchaser to make up any losses in foreclosure. That is, if the outstanding balance on the note is greater than the value of the property the borrower could not just discharge that difference (without going through bankruptcy or something). Is this incorrect? Or are we just talking about properties that are no longer gaining value, not ones where the owners have lost value?
I agree immorality doesn’t really enter into it - it’s just business. If it happens too often, banks will just increase their rates to offset the increased risk of foreclosure. It does hurt the “honest” borrower though.
True immorality, to my mind, would be those who are foreclosed on and then trash the house (remove wiring, break sheet rock) just to “hurt” the bank. That’s basically vandalizing the bank’s property.
Sure it’s hard to shed a lot of tears for the bank. As I understand things, they set a higher interest rate if the mortgage property is a second home or investment property. Because they know there is a higher risk of default.
I think it’s just a business deal and it’s not immoral to take advantage of the terms of the deal. The bank has the option not to offer such a mortgage. They could have structured the deal in a way the protects them from people doing this. (Like a car loan, where they can repo the car but you are still responsible for the difference if that doesn’t cover what is owed.)
Yes, a lender can get what is known as a “deficiency judgment” in foreclosure for the difference between the value of the foreclosed property and the outstanding balance of the loan, plus interest and other charges.
In New York at least, a lender will have to go through a few more hoops to get a deficiency judgment in addition to foreclosure of the property, and then faces the problem of collecting the deficiency judgment. As a result, lenders will often accept a “deed in lieu of foreclosure”, a short sale, or just not bother with the extra effort of getting a deficiency judgment. Either way, though, it is going on your credit report, and any foregiveness of debt is taxable income.
There are some American States, California being the most prominent, where home mortgages are normally “non-recourse”, meaning that in the event of default, a lender has recourse only to the pledged collateral, and nothing else. I imagine you could probably come to such an arrangement in other states too.
That’s just smart business and I’m glad to see people finally doing this. I advised a friend to do this during the savings and loan crash in Texas but she didn’t want to ruin her credit.
If you must look for a guilty party, and I’m not so sure there is one, remember that the person who sold the house for a higher amount than it is currently worth still has that money in his pocket.
You can get non-recourse commercial financing in New York and, I believe, all other states (where the interest rate is appropriately adjusted for the additional risk of being non-recourse). However, residential loans in New York are made on a recourse basis (i.e. the lender can get a deficiency judgment).
How the heck is it the fault of the person who sold the house, at a mutually agreed upon price? I’ve never seen a real estate sales document that promises the value will go up.
If the house is a second home for investment, then surely the forgiveness of debt should be offset against the capital loss suffered by the owner? (Though this might not apply to a first home, where capital gains are not taxable, although to be equitable the same principle should apply).
But some systems of morality- probably most of them, to one degree or another- say you can’t put aside morality when making a business decision. You are still obligated to “do the right thing” (whatever that might be) even if doing so means you’ll lose money in a business transaction.
Unless the signed contract specified that the homeowner had the right to stop paying under defined circumstances, it seems to me there is an ethical component to this. If you formally agree to do something and then decide not to, that’s unethical.
In stock trading, there’s a “rule of the greater fool.” The seller thinks he has sold at the right time, and he’s surprised to find a fool who’ll pay so much money for something he doesn’t want. The buyer thinks he’s getting in at the right time, and he thinks the seller is a fool to let it go for that price. One of them is the greater fool, and each one hopes it isn’t him.
A house is worth what somebody will pay. The seller is not a villain to allow a buyer to offer what he offers. The buyer thinks the seller is the greater fool. Maybe, five years later, it will be true.
Agreed - “it’s just business” is too cursory a statement. I think not paying a debt owed if you are financially able to is probably immoral in many circumstances. However, with a mortgage, the debt is explicitly backed by the property and their are specific remedies in place for non-payment. I think these caveats make non-payment a morally acceptable decision.
A mortgage lending agreement is a mountain of paper, many paragraphs of which are tied to the consequences of non-payment. Clearly the lender not paying the amount due is a foreseen possibility, and is reflected in the interest rate.
Sorry, perhaps I was overly terse. I certainly didn’t intend to imply that the original seller was at fault in any way for the selling at whatever price the buyer was willing to pay. It’s just that, in these situation, people wonder where the money went. The borrower in this example doesn’t have the money that the bank loaned, so he isn’t walking away with the bank’s money. The original seller has that money and he ain’t giving it back.
The bank gets a house that they agreed was worth even more than what they loaned out. I don’t see how they are getting a raw deal … unless someone promised them that real estate values always go up AND that all borrowers will always pay them back, no matter what.