Morality of Intentional Foreclosure

Great Debates
61

[QUOTE=Hakuna Matata]
<SNIP>

But my understanding of the issue presented by the OP was that these people HAVE money in the bank, but are choosing to default because the terms are no longer to their advantage. Isn’t that substantially different then a mortgage company declaring bankruptcy? I think the struggle I have with this question is that they have the means to pay this debt, but are choosing to walk away from it.
[/QUOTE]

That is my understanding as well. Some people have chosen to stop paying their mortgage simply because the price of their home has fallen. This is wrong. When home prices rise, the bank can’t come and ask a person for more money. You (the generic you) agreed to pay that amount. You were happy with the agreement when you made it. It is a risk in life that prices may fall.

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[QUOTE=Hakuna Matata]
But my understanding of the issue presented by the OP was that these people HAVE money in the bank, but are choosing to default because the terms are no longer to their advantage. Isn’t that substantially different then a mortgage company declaring bankruptcy?
[/QUOTE]

No. Businesses file strategic bankruptcies all the time to get out from under debts. (Chapter 11 reorganizations, not talking about Chapter 7 liquidations.)

63

Can Countrywide sue after a foreclosure? - Bankruptcy Forum Chapter 7 13 341 Meeting Credit Collections Not only can you be sued for the balance owed but if a lender forgives a certain amount to keep you in the house ,you have to pay taxes on it as if it were income.

64

[QUOTE=askeptic]
Wombat, what about my situation with Verizon? Furthermore whose eye are you going to look into when you need to make a contract with GM or AT&T or some other huge company? Whose honor are you going to rely on?
[/QUOTE]
If I am forced to write up a contract with a company like that (which doesn’t happen often), I simply walk into it with my eyes open, assuming that they expect to screw me given half an opportunity. Don’t like it. Leaves a bad taste in my mouth. But sometimes you gotta do what you gotta do.

[QUOTE=askeptic]
What if your decision to stand by your word costs half your employees their jobs?
[/QUOTE]
Reductio ad absurdum. If a terrorist kidnaps my children, holds a gun to their heads, and tells me to break my contract or they die, I break the contract. Everybody has a line somewhere. Finding mine doesn’t really accomplish much. I think anyone who goes into a contract expecting to break it is unethical. I think violating a contract for the sake of convenience is unethical. I don’t like it. But, as I’ve stated before, I do understand that there are a lot of unethical things that are perfectly legal.

[QUOTE=askeptic]
This should be an interesting link for you Wombat.

http://www.msnbc.msn.com/id/22248590/

Check it out then tell me about how honorable corporations are.
[/QUOTE]
Here’s an interesting link for you, askeptic.

Check it out then tell me about how honorable people are.

Do you see my point yet? The corporation that owns the shop down the street has two shareholders: Bob and his wife. They’re good folks, and I would expect them to be true to their word. Verizon is a monstrous corporation where matters of honor, ethics, trust, morals, and honesty are pushed aside by what I’d call bad business and what you’d call good business.

I will never accept the statement “all corporations are dishonorable,” because it simply isn’t true. I will also never argue with the statement that “many corporations are dishonorable” because it most certainly is true.

65

[QUOTE=msmith537]

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.

[/QUOTE]

back in 81, I lost my lucrative job, and soon was running into serious financial difficulty. I put my house on the market for 9 months while real estate values kept rapidly dropping. During that time I ceased paying on my mortgage as I kept dropping the asking price . Finally the bank offered me $2000 to walk away. I accepted. I started with $20,000 equity when I purchased, and I figured I got back about $9000 (cash and free use of the home) for a loss of $11,000 which I quickly made up when I was able to get back in the market. The relevancy? The banks want you to walk away if you can’t pay.

Furthermore, here in Canada the lenders require mortgage insurance paid up front into the mortgage costing several thousand dollars when you can only put up less than 20%. Foreclosures are a fact of life and banks here do protect themselves.

66

I think the differing opinions regarding the morality of ceasing to pay the amount due on a mortgage come down to whether it is “breaking one’s word”. Obviously most moral systems require that people do everything possible to keep a promise.

The question is: what is promised in a mortgage agreement? Is it to make the payment every month? Or is it to make the payment every month with the understanding that failure to make payment will result in loss of the property and perhaps other damages? If it is the first, then ceasing to pay is a morally impermissible breaking of a promise. If it is the second, then I don’t see how payment/non-payment is a moral question at all - both parties are simply executing the terms of the agreement.

67

I am speaking only from personal experience here. My son’s house was foreclosed on. It took 1 year from the day from the first missed mortgage payment. It was auctioned and sold for more than twice the amount of the mortgage. By law, he got the difference, after the mortgage was paid out, and all costs deducted.

This is Canada, specifically BC. Had the house not brought enough to cover the mortgage, he would have been bound by law to pay the difference, plus costs. Often, however, the lender signs off on such cases knowing they will never see the balance or costs. Often, not always.

I think it is unethical to walk away. Adult persons who undertake to buy a house they can’t afford, no matter how encouraged they might be by unethical lenders, are, in my view, morally obliged to pay the debt. I agree with InvisibleWombat.

Your mileage may differ.

68

Missed the edit window.

I wasn’t aware that mortgage insurance came into effect in the event of a foreclosure. It didn’t in my son’s case, at any rate. (He had mortgage insurance.) It was my understanding that it was on the life of the insured, not on ability/desire to pay.

69

[QUOTE=vison]
Missed the edit window.

I wasn’t aware that mortgage insurance came into effect in the event of a foreclosure. It didn’t in my son’s case, at any rate. (He had mortgage insurance.) It was my understanding that it was on the life of the insured, not on ability/desire to pay.
[/QUOTE]

B.C. here as well. You’re talking about mortgage life insurance which I’ve had for every house I’ve purchased provided “free” by my bank. The Insurance I’m talking about is for CMHC mortgages which doesn’t apply unless the down payment is less than 20% and given the proceeds of your son’s foreclosure it doesn’t seem likely that he would have to had purchased it.

I’m curious, given the equity that your son had, why he couldn’t have avoided all the administration and court costs associated with foreclosure and disposal of asset, by selling the house himself.

70

[QUOTE=The Flying Dutchman]
B.C. here as well. You’re talking about mortgage life insurance which I’ve had for every house I’ve purchased provided “free” by my bank. The Insurance I’m talking about is for CMHC mortgages which doesn’t apply unless the down payment is less than 20% and given the proceeds of your son’s foreclosure it doesn’t seem likely that he would have to had purchased it.

I’m curious, given the equity that your son had, why he couldn’t have avoided all the administration and court costs associated with foreclosure and disposal of asset, by selling the house himself.
[/QUOTE]

Well, now I’m really confused. First, mortgage insurance is not provided by banks any more, and even when it was, it wasn’t “free”, as I’m sure you know. It was common at one time for the bank or credit union to add the life insurance premium to the mortgage payment, but they will no longer do that. Unless there has been a change I’m not aware of, which is perfectly possible.

On the other hand, if you don’t purchase mortgage insurance, you won’t get a mortgage. Some banks have insurance agencies in house, eg. the larger credit unions, but the premium will not be attached to the mortgage payment. Now, I haven’t been on the credit union board for about five years, so I guess things could have changed. But as I recall the CMHC mortgage was still “life insurance” with the mortgage grantor the beneficiary, in this case, CMHC. I remember when the first 95% mortgages crossed our desks, I was horrified and still am.

As for my son, it was crystal meth at work. My husband and I did consider taking over the mortgage, but in the end, we didn’t. In some ways I regret it, because it was a beautiful house in a beautiful neighbourhood and we could have held onto it for our grandsons, but. But. He did have mortgage insurance, but it was “life insurance” with the mortgage company as beneficiary.

I should pay more attention, I guess. I didn’t realize things had changed so much.

71

Of course, if I had checked the CMHC site, I would have known what you were talking about. Yes, a different kind of insurance, not life insurance.

72

[QUOTE=InvisibleWombat]
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 think violating an agreement with a large faceless group of investors is just as bad as violating an agreement with your best friend.
[/QUOTE]

I don’t see how anyone has violated a signed contract/agreement. The contract contains terms on what happens if you don’t pay, so how is it being violated? I’m still in it, so to speak - just a different part of it is “operational”. The contract in total covers the circumstances. I haven’t agreed to keep paying in perpituity, I’ve agreed to what I’ve agreed, which is the whole contract, not just one part of it.

73

[QUOTE=Khadaji]
That is my understanding as well. Some people have chosen to stop paying their mortgage simply because the price of their home has fallen. This is wrong. When home prices rise, the bank can’t come and ask a person for more money. You (the generic you) agreed to pay that amount. You were happy with the agreement when you made it. It is a risk in life that prices may fall.
[/QUOTE]

The Bank has taken a risk, too - a risk you will not pay them back. It protects itself by taking security (on the house), and sometimes in other ways as well.

That’s what a contract is in part - a weighing of risks and anticipated benefits. The bank is paid to do this weighing, as the risk it is taking with its cash is reflected in the interest it charges and in the contractual provisions it made to protect itself.

If the real estate market tanks, who should bear the loss? It isn’t obvious that it must be the homeowner. If the homeowner runs the numbers and realizes he or she would be better off foreclosing, after suffering whatever penalties are built into the contract, that is an “efficient breach” (I see someone referenced the concept above). There is absolutely nothing immoral or unethical about making that decision. The bank was “happy with the agreement when it made it” and it is “a risk in life that prices may fall” - for it. If the bank was concerned, it should have made a better deal, one in which it would not be worthwhile for its customer to foreclose on - for example, demanding a larger down-payment or other additional security.

74

If you can afford to pay and it is strictly a financial decision it seems a little sketchy to me at best. To give another example, what if someone holds your drivers license to make sure you return a $200 tool, you decide to keep the tool and get a duplicate license from the registry for $25?

On the other hand if you are in serious financial hardship that is what the penalty was designed for (IMHO).

My sob story –

I am having serious financial problems due to a divorce. I have been trying to sell my house with the intention of splitting any equity with my wife. Every month I keep the house costs me several hundred dollars more than an apartment would. The septic system failed the test my state requires, that means I need to hook up to the city sewer or install a new septic system to sell the house, ~$20,000 either way and means the best I can do is break even with a sale. Since I don’t have $20,000 the money needs to be left in escrow, this scares away pretty much anyone who is interested in the house.

I have fallen 2 months behind on my mortgage, I was getting an income tax refund that I intended to use to catch up. I had resigned myself to living in the house and living on an extremely tight budget when I got a letter from the bank sent two months to the day from my first missed payment. They are beginning foreclosure proceedings and intend to sue me for any shortfall between the sale price and what I owe. If I want to catch up I need to send the two payments I am behind PLUS $500 in attorney fees plus any other fees they incur.

Fuck them, I have been struggling to pay leaving myself scraping by financially and they hit me with an extra $500+. This is the straw that broke the camels back, I’m going chapter 7 (bankruptcy) they can have the fucking house, smart move assholes.

75

[QUOTE=Anachronism]
If you can afford to pay and it is strictly a financial decision it seems a little sketchy to me at best. To give another example, what if someone holds your drivers license to make sure you return a $200 tool, you decide to keep the tool and get a duplicate license from the registry for $25?

[/QUOTE]

Again it depends on the contract. In most cases, security isn’t the only remedy a lender (or anyone) has against the other party - take your example: the reason someone would want to hold your license is not because it is valuable in and of itself (as you note, you can get another from the registry), but because it reveals your identity, thus making it easier to claim the $200 tool back. Naturally, any agreement express or implied concerning the rent of a $200 tool is not going to say “the only remedy in case of you not returning the tool is that we keep your license”. It is going to say that you gotta return the tool.

In the case of a home mortgage, in some cases the bank limits its security to the house itself (plus legal fees etc.). In that case, seems to me nothing whatever wrong with taking the foreclosure option, even if you are a millionaire, as the bank has in effect decided how the risk of a falling market is to be split - and it is absurd to say that a mortgage contract whose terms are more or less unilaterally set by a bank, which is supposed to be expert in that sort of thing, is unconcionable as against the Bank.