There is no walkaway. If they default they are responsible for the balance. for the difference from the mortgage and the dumping price.
It would seem that this is another markin the plus column. 
I think most mortgages are non-recourse, that is, the paper work specifically says that if the debtor walks away, they are not responsible for any difference between whats left of their loan and the dumping price of their property.
:dubious:
When a company does “smart business” outside of ethical boundaries, thereby shafting a familt, I don’t think the company gets a pass…
Guess it depends on the definition of ethical.
So you’re saying that because a retail store increases its prices slightly to offset the risk of shoplifting, then shoplifting isn’t immoral?
The immorality is that you signed a contract saying you’d do something, and then you decided not to do it.
I think the point being made here is that one signs a contract agreeing to do something or else suffer a penalty and then later decides that suffering the penalty is preferable to doing the whatever-it-is. According to that argument, morality doesn’t enter into it.
There is a reason contract law does not allow general damages. The law is set up to encourage participants to make the best economic decision. If it makes more economic sense to breach a contract and pay contractual damages then there is nothing “scummy” about it. Big corporations do not waste a single minute considering “moral” obligations. In fact if they did they would promptly be sued by their investors. Business and contract law is based on economic efficiency not morality.
There doesn’t have to be a seller. Consider a house bought for less than the current value, on which a large home equity loan was taken out before the crash. Even assuming the house has enough value for the primary mortgage to be fully paid off, the equity one might not be. In this case the buyer and the seller are the same, in a sense, and the bank erred in not considering the possible decline in value when making the loan.
I knew people in Louisiana who walked away from loans in 1980. They did it because they were moving, and owed more than the house was worth. These loans weren’t ARMs or subprimes. I don’t consider them immoral, since they are exercising their right to give up their collateral, and were not doing so only to reduce their indebtedness.
I have read the entire thread but am confused- if you walk away from a 500k loan and have one million in the bank, you can’t be sued for doing this?
NOTE: To put my comments below in context, I do not agree with what lenders did with the subprime mortgages. Don’t like it at all. But askeptic and others seem to feel that people should feel no moral or ethical obligation to meet their contractual obligations–that signing a contract doesn’t commit people (or businesses) to do what they’ve promised. I disagree.
Integrity is important to me. If I sign a contract saying I intend to do something, then by golly I intend to do it. I expect the people I do business with to work the same way. Those penalty clauses are intended for people who find themselves in a position where they cannot meet obligations, not for people who just don’t feel like making payments.
I don’t buy that. You really think investors would sue a company for being honest and trying to meet their obligations?
Only if it’s cheaper to meet them than not to meet them.
In many cases, the contract specifies that the banks can’t go after you for the rest of the money after they’ve repo’d the property, regardless of how many other unrelated assets you might be sitting on. See my previous post.
Shareholders would sue in a minute if the corporations failure to breach a contract had a negative impact on the value of their shares. Not only would they sue but they would win. You are confusing contract with morality. You would agree that laws punish behavior that is deemed improper? Well how do you explain the fact that the law imposes no punishment for breach of contract but does punish corporate directors for NOT breaching a contract when it is beneficial for the corporation to do so? There is a difference between personal agreements between people and business contracts. If I take a personal loan from someone I know as an individual it will be a cold day in hell before I fail to pay it back, but if I enter into a secured home loan with a corporation that is nothing more than an arms length business transaction I will breach it in a hot second if it become economically advantageous as would the corporation.
I agree. The borrowers didn’t sign a contract that said “I will repay this loan because I am a good and wholesome person, and repaying loans is the morally correct thing to do”. They signed “I’ll repay, or you can have the house”.
The mistake here was on the part of the lenders, who, it seems, equally bought into the “housing will always go up, forever and ever” mania, and didn’t ask for any kind of down payment. If the borrowers had some sunk costs, it would be harder for them to walk away.
Many contracts have provisions for one or both parties to “walk away” from the contract should the contract terms no longer give benefit. That does not make it a penalty. Sometimes, in business, you find that what you thought was a good idea actually wasn’t, and you need to exit that business. Because that is very, very common, many contracts include exit clauses. I know every time I have a contractor do renovations on my home, there are exit clauses. Usually, I’m on the hook for materials purchased and labor up until the point of dissolution. If that amount is less than the down payment, I am due a refund.
Well, any way you slice it, you will likely be sued to foreclose the mortgage, unless your jurisdiction uses an alternate procedure not involving the courts.
Going beyond that, it depends whether the mortgage is considered “recourse” or “non-recourse.”
If under the law or under the terms of the mortgage, it is “non-recourse”, all the lender can do in a foreclosure is reacquire the property or have it sold in a judicial auction sale. The lender cannot go after any other assets of the borrower.
If, on the other hand, the mortgage is a “recourse” mortgage, the lender may, in addition to reacquiring the property or auctioning it, obtain a default judgment against the borrower for the amount of the deficiency. With a default judgment, the lender can chase after the other assets of the borrower (like a bank or securities account) using that state’s procedures for collecting a regular judgment.
Is that in the contract?
Where do you define “cannot” versus “don’t feel like”?
Who am I to say that I “don’t feel like” scrounging for meals in dumpsters, so I’m buying food in a store instead of paying the mortgage?
What’s nice about the laws as-is, is that nobody has to crawl into my head to justify my actions. If I do W, then X happens. If I do Y, then Z happens. Everyone knows WXY and Z when the contract is drawn and signed.
Thing is, there’s a doctrine in contract law called “efficient breach.”
Would anyone claim it’s immoral for a corporation to decide not to perform its contract or pay back its loan? I doubt it. The system in which contracts are made and enforced includes breaches.
Ditto bankruptcy. Bankruptcies are most often criticized on moral grounds when consumers file them. In fact, one of the first preemptive bankruptcies, involving Johns Manville’s sucessful bid to force those injured by asbestos to accept a mass settlement, was weakly criticized because Manville was not insolvent according to any of the legal standards. Its lawyers and some respected legal scholars rightly noted that insolvency is not a requirement for filing a case under the bankruptcy code. That’s how the court ruled.
Simultaneously, creditors were asking bankruptcy courts to rewrite the bankruptcy code in consumer cases by suggesting that consumers who filed for protection under Chapter 7 were engaging in fraudulent filings or substantial abuse. They won, too.
To expand on Billdo’s point, whether you get sued or not for not paying your mortgage is a complicated question. For one thing, many states permit non-judicial foreclosure. Often non-judicial foreclosure proceedings offer some trade-offs. Here in Michigan, for example, a lender can “sue” you to foreclose. It’ll take much, much longer to do that, and at the end of the day, the lender might have a deficiency judgment. But you’ve just lost your home in foreclosure, and might even be considering bankruptcy. In most cases the judgment is worthless. On the other hand, the lender can send you a notice or two, publish an advertisement in the paper, and sell the house. It still takes a long time. In most cases the borrower has what we call a right of redemption, and in most cases that right lasts for six months. This means that the borrower gets to stay in the house for about nine months without paying the mortgage. But it’s still faster than a judicial foreclosure. A non-judicial foreclosure pretty much means the lender can’t get a deficiency judgment, but as I pointed out, they’re often worthless. So here, those who don’t pay their mortgage frequently do not get sued. They still lose the property and the foreclosure still shows up on their credit reports though.
Here is a list of states and the normal method of foreclosure: http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4330.4/43304x6HSGH.pdf
And here is a list of times that HUD says are reasonable for completion of foreclosure: http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4330.4/43304x7HSGH.pdf
So you can see:
- In many jurisdictions, non-judicial foreclosure is the norm; and
- It can take a really long time to get the property back.
That’s not entirely true. Generally, there is an incentive in business to deal ethically with people, if for no other reason, so that you can do business with them in the future. Otherwise, no one would pay their bills.
I don’t really think ethics enters into it. There are simply actions and consequences. I think following the rules blindly is as foolhearty as completely ignoring them.
Gfactor, I’m not arguing about the legality of the situation. I’m sure you’re right. But if I’m the only one on this board who thinks that violating a signed contract when it becomes inconvenient isn’t sleazy, then just call me an anachronism and move on. I sure am glad I live in a town where people’s reputation and integrity actually mean something.
So it’s okay to screw a group of people you don’t know, but it’s not okay to screw a single person that you do know? I just want to make sure I’m reading you right.
I have been a majority owner (>10%) in four corporations, all of them fairly small. The largest had about 160 employees when we sold it. When we made a contractual commitment, we did everything in our power to honor it. That’s why we had repeat customers. I would never do business with anyone who intentionally broke a contract just because it wasn’t as good as they thought it was. It may not be illegal, but it’s certainly unethical. How could you ever trust someone who did that?
It’s a difference in philosophy that we’ll probably never resolve. I think violating an agreement with a large faceless group of investors is just as bad as violating an agreement with your best friend. In either case, you’ve made a promise and you’ve broken it.
If I borrow your lawnmower, is it okay to decide it’s economically advantageous to keep it instead of returning it to you?