I would go further than this – these provisions aren’t something that borrowers fight tooth and nail to get put into the contract to hold the bank over a barrel. The bank writes the damned contracts, and generally borrowers simply agree to the terms that the bank proposes.
So it’s like this:
Bank: "If you don’t pay, we’re going to do x, y and z.
Borrower: “Well, okay. Seems fair to me.”
[time passes]
Borrower: “You know when you proposed doing x, y and z? I’ll take that deal now.”
Chorus: “How DARE you screw the bank like that!”
Urgh. I read this article. This isn’t evidence, this is a just-so story. Even she admits, in her article, that her thesis is speculative.
If someone wants to propose an economic model, I expect to see data and regression analysis. I expect to see a proposed model that I can put against the data and examine. If someone tells me that a particular lender pulled out of Memphis because of its bankruptcy culture, then I expect to see a comparison of lenders nation wide and state wide and their operations.
Instead we get told that the city went bankrupt in 1879! Yes, the evidence presented for something (I’m not sure what) is a hundred-year old event. Why stop there? I’m sure there are tons of anecdotes we can throw in. Remember when Thog refused to pay interest on his club?
So, I read the second McArdle article. Man, she has no idea what she’s talking about.
[QUOTE=McArdle]
There has been a meme going around for a while that you don’t really have a moral obligation to pay your mortgage, because the contract contains embedded options for the lender: you can pay them back, or they can take the house. I’ve long thought that this was rather silly. Go look at your mortgage documents. You will notice that the contract does not specify any option for you to give them the house in lieu of payment. The note you signed includes a promise to pay, period. It also specifies what will happen in the case of breach, but you have specifically promised to avoid breach at all costs.
[/QUOTE]
This is not how the law works. All US jurisdictions regulate contracts. There are types of contract clauses that are valid and there are types that are invalid. It doesn’t matter what flowery language you put in the contract, if the clause has no legal weight, then it is meaningless.
So, if we’re in a pure non-recourse state, it doesn’t matter that the contract says you promised to avoid breach at all costs. That clause doesn’t mean anything legally. If you’re in one of those states, and the bank agreed to make you a loan, then they knew full well that the contract gives the you the 2 options we’ve been discussing. Now, maybe the law in a particular state does put some burden on the borrower to avoid default. In which case, you agreed to that burden.
But what McArdle is arguing here that you have a moral obligation to abide by unenforceable or legally invalid contract clauses. Well, if the lender is an unsophisticated party, I could maybe see that. But as Ravenman points out, we’re dealing with lenders who know full well what the terms of the contract are. Her position here is bizarre.
Of course the people who work for a corporation, or own stock in a corporation can act morally as INDIVIDUALS. But I don’t have an agreement with any of them as individuals. I have an agreement with a collective whose behavior is not governed by a guiding moral conscience, but a set of amoral rules intended to maximize profit. Because each individual in the collective only is aware of a small part of my interactions with the totality, there may not be a single person in the corporation in a position to judge whether its actions toward me are moral or immoral. In such a situation, where reciprocity is impossible, assuming a moral obligation is folly – a folly that predatory, amoral corporations are, of course, happy to encourage since it makes it easier for them to lay claim to things that are not legally theirs.
I believe that an agreement to borrow money should be made in good faith, meaning that going in both parties to the agreement are willing to fulfill the terms of the agreement, but I also allow for the possibility that circumstances can happen that will not allow the debt to be repaid. If a business borrows money and fails due to market forces, shifting preferences, or some unforeseen disaster and cannot pay it back, it is not their fault. If I assume a debt and circumstances arise that I cannot pay it back, that is not my fault.
That said, I do not approve of usury (like payday loan companies), bankruptcy shielding to retire the debt without paying it if the means exist, or other types of overt fraud (or at least what I consider fraud and not necessarily the legal definition, payday loans are legal but surely unethical). The hard part, of course, is knowing who is entering into an agreement in bad faith, thus we have the existence of the credit system.
Once an unpaid debt is discharged, I have no problem with that going on a negative report, though. Trust is all we have, and it must be earned. once lost, it must be re-established.
As with everything, it’s never as simple as we want it to be. I owe a lot of money for various things, and before all is said and done I will owe more. I consider it a personal obligation and I will move Heaven and Earth to fulfill my end of the deal because the party that loaned me the money has done their part. That’s a personal quirk of mine that I make no exceptions for myself, but who am I to judge the circumstances of others?
Generally, yes. (Generally meaning, not in all cases)
In a business environment, the officers of the company have a fiduciary duty to their shareholders. If the benefits of breaking a contract (via the termination clauses) outweigh the costs, both in dollars and goodwill, what justification is there to saddle the shareholders with the bad contract?
In a consumer environment, the consumer (IMHO) has as much, if not more, fiduciary duty to his family than the employee does to his shareholders.
Now, with respect to your widows and orphans, I consider it quite bad form to take advantage of someone’s lack of experience and knowledge to engineer a one sided contract in your favor, then use that contract as justification for taking their money. In a situation like this, I would not be in favor of using any and all contractual means for profit.
This situation does not exist in mortgage debt. Banks are not similar to widows and orphans in any conceivable way. They were not taken advantage of. Contract terms were not skewed to the borrower’s favor. They were not ignorant of any aspect of mortgage law, or inexperienced in negotiating mortgage deals. At worst they are one side of a business to business deal, where nobody anywhere would blink an eye at a business cancelling a contract that no longer benefits them. It happens every day, it’s normal business.
Let’s put it another way. Suppose you purchase stock in a corporation. The corporation then goes bankrupt. It owes far more than its assets are worth. The corporation’s assets (including things like the company trademarks and IP) are seized and divided up among the creditors. Your stock is now worth nothing, and the corporation you bought stock in no longer exists, even though there may be a corporation doing business under the same name, that corporation is owned by the creditors, not original stockholders like you.
So do you have any further obligation to pay back the creditors? You were the owner of a business entity, that entity took on debts and could not pay, and on dissolution of the entity creditors were repaid with pennies on the dollar.
Are you ethically obligated to track down all the creditors and repay them out of your personal funds? Why or why not? Don’t tell me that a corporation provides limited liability as a matter of law, we’re not talking about the law, we’re talking about ethics. Is the bankruptcy of a limited liability corporation unethical because the shareholders are only on the hook for the amount of their investment? Or are the owners ethically responsible for the entire debt of the corporation? Would it make a difference if the corporation had only a few shareholders, or one shareholder?
Further muddying the ethical situation, the person who is considering whether to walk away from a loan is almost certainly walking away from something now owned by a totally different entity from the one he made the loan with. The contract was transferred without the consent of the borrower, and I’d have a hard time justifying how an ethical obligation could be transferred also. Not to mention that the debt is now sitting in lots of little pieces owned by lots of people, and often not of a magnitude in any person’s portfolio to create a major ethical dilemma. The bank the borrower is in contact with just manages the loan, but does not own it any more. (Assuming they can prove even that much.)
As far as corporate ethics go, many large companies have codes of ethics which the publicize internally and quiz employees on. These have no legal weight, of course. I wonder what Countrywide’s were. If the actions of a company with respect to customers break the company’s own ethical code, does the customer have the same obligation to the company as if he were treated decently?
That’s where I make a distinction. Assuming the loan has been resold or sliced, it is indeed morally required for the debtor to repay the loan. He does not have a moral obligation to repay anyone other than the original creditor. The original creditor has the moral obligation to pay the new creditor, or divide the loan payments, or whatever.
I mention this more below, but my point here is that moral duties apply to the individual; the stupidity of others does not reduce my moral duties. I may owe money and ought to repay it, even if the object of my duty is a dumbass.
IOt’s more useful to society to allow a company to continue post-pankruptcy, but you’ll be happy to note that it usually destroys any equity the previous owners who allowed such a thing and generally clears out old management as well.
Morally, you’ve more or less made a gift from your end. That doesn’t excuse your friend from repaying, nor from repaying any of the other amounts his borrowed. In any interaction, there are two moral actors, and their moral duties do not neccessarily mesh perfectly. You may be morally expected to accept your loss; he may be morally required to pay it. Depending on your knowledge fo the situation, that may indeed be the case. Of course, life is always a gamble. We do not know what will happen and must make best-guesses, which sometimes include doing things we don’t like in order to accomplish other goals.
If there was any fraud involved, that’s another question entirely. Both people and companies consider the risk of default, but likewise are unwilling to completely cut off high-risk loans, the former for personal reasons, the latter for PR and social ones.
So you assert that all corporate entities are inherently amoral and trying to screw you over? Let me ask you a question; do you have any moral objections, then, if they do screw you over? y your own lgihts, that is perfectly fair. You did, after all, publicly declared war here. Do you then have any objections if they used the law to ruin you first?
Definitely not. You were an absentee owner at best, and did not take on those debts; you did not agree to them and did not promise to pay personally. The corporation did. It is a (legal) person with its own debts and assets; just as you don’t get free access to the assets, you don’t have responsibilities for the debts.
The law does recognize that there are rare times when a supposed distant owner exerts undue influence. Though unusual, it is possible for creditors to “personalize” debt. But this is essentially an allegation of fraud.
Since you did not, in fact, stop responding, I may as well continue.
The market value of a loan is chiefly built on two things: the principal/interest (i.e., the Net present Value) and rate of risk. The collateral is a tertiary consideration at best, and is often not considered at all. This is quite often because actually recovering the collateral is a long, uncertain process with limited financial utility.
Having good collateral is a concern to the primary lender, who often won’t make a large loan to someone who hasn’t had one before without it. Which is why, of course, it’s so important in housing loans because generally the new homeowners don’t have a history of taking and paying 300K loans. But it doesn’t much change the market value of the loan later on, precisely because it doesn’t change the default risk. The house isn’t very useful once you really face down the long and difficult prospect of dealing with consumer bankruptcy, eviction, paying for any repairs or cleaning, and resale. It is a small, practical hedge against risk and does not greatly affect the value of the loan.
It’s also clear that you don’t understand that between population mobility and depreciation, it’s quite irrelevant. It doesn’t matter what happens in a hot economy - you could invest in boats in a sufficiently hot economy and get money out of it. Are you honestly trying to claim that a depreciating consumer product dependant on blind chance of population flow is a good investment?
Land may be a good investment. Housing stock is not. Houes are an illiquid,
It’s bizarre to claim that once you say you’ll undertake an obligation, you will in fact fulfill it?
Remind not to rely on you for anything. Oh wait, since I recognize you have no legal requirement to do so, you feel no compunction about ignoring it.
And yes, she is speculative; all possible observations here are neccesarily speculative because you will never have the “full story”. But it’s a powerful circumstantial evidence. The matter cannot be proven, but it’s hard to argue otherwise in any of her examples. However, I’d like to thank you for demonstrating repeatedly that insults and mockery and are no substitute for argument.
Terms in contracts carry prices. If one wants a more favorable contract, the market, blessed be it’s holy name, dictates that you pay more.
Mortgage loans are priced based on the contractual terms. The interest rate is set up to compensate the lender for risk, including the risk the house price falls enough to make walking away profitable for the borrower.
Absent that risk, the borrower would receive a better interest rate. Why do you hate the market?
Now a loan from and old style friendly society, cooperative, out benevolent society, made from member contributions? There is more likely to be a moral aspect to repayment there. But those organizations don’t exist as much anymore. You want a free market? Then stop trying to expect one side of the transaction to voluntarily place itself in a worse position.
Well, except the legal field. And possibly accounting. Engineering also has a lot of rules. Really that’s a ridiculous statement. Most professions are subject to “rules”. What it sounds like is you don’t like “rules” when they are not to your advantage or disagree with your personal code of ethics. Well that’s the reason we have rules. Because everyone has a different code of ethics.
Debt is simply an agreement between two parties and those “rules” are the terms of the agreement. In the event that a person is unable or unwilling to pay their debt, there are rules for breaking the agreement.
It’s silly to speak in absolutes of “repay your debt no matter what”. If you have been defrauded, you are under no obligation to repay the defrauder. The debt you agreed to was contingent of some sort of product or service that was not provided.
You may, if you read closely… or not at all closely… or at all, period… see me note several times and warn about the nature of farud, and how it does, in fact, cancel any moral debt.
I think the reason you may feel this way is because you are not making a few important distinctions. Situations like this have less to do with debt or service contracts than they do with the difference between actions governed by business norms as opposed to those governed by social norms. Business norms (and law) are often codified by lawyers, and practiced in a business environment. Social norms are typically what governs interactions, relationships, and arrangements between friends, family, and associates.
The difference is that most contracts these days are governed by business norms. You are clinging to a bygone era before credit scores and debt to income ratios, where a loan could be secured at a local bank on the basis of your relationship with the banker, and your status in the town. Today, loans are not given for personal or social reasons, but for business reasons. There is no external morality that governs these agreements beyond the law, and what is spelled out in a contract. Just as a business has no problem using strategic default to its advantage, so too should any actor (individual or otherwise) who is party to an agreement governed by said norms.
The reason this is the case addresses your second (incorrect) point. With regard to business arrangements, society is not better off as a whole when there is an additional moral obligation to fulfill business contracts. This is why there are bankruptcy laws. Please note that bankruptcy or default typically does not result in the creditor receiving nothing. It allows businesses or individuals the financial freedom to engage in more advantageous and productive exercises. Being burdened with debt in an bad contract often means the actor(s) cannot use those resources to perform more productive acts. Additionally, the reason why banks and other lending institutions shifted away from social norms is because they are often not profitable, and they are subject to various forms of bias (gender, racial, etc). Having a formal system where expectations, requirements, and behavior is spelled out explicitly is better for business, and it’s better for individuals, and it’s better for society.
Alternatively, other loans, contracts, etc. are governed social norms. If I borrow money from my brother, there is a moral obligation to pay him back because the loan was given on the basis of our relationship, and not because of a business rationale (credit worthiness, etc).
That is certainly not the stated purpose of the law, but rather your bias showing. The cost needn’t be a lower functioning society, and it usually isn’t (see above).
Second, lawyers are often the butt of jokes, but if you judge people by their actions, they are one of the most respected occupations. A good chuck of our elected officials are lawyers. If people truly had little respect for such people, they would likely not elect them to public office, pay them a lot of money, call them whenever they are in trouble, or rely on them to create and officiate the rules we all abide by.
What are you basing all of this on? Where is the evidence that if people continued to pay these debts at all costs, that there would be a net positive result? Where is the evidence that a good portion of these bankruptcies are avoidable at all? All the evidence I have seen from Memphis, among other places, is that the vast majority of these people cannot afford to pay.
Regardless, the situation in Memphis is that it largely reflects reality. Even if the small portion of those debtors who defaulted continued to pay their debts, then you would just be artificially inflating housing prices, sending a signal to lenders that lending to people in the Memphis area is a better proposition than it really is. Society is always better off when the people making decisions have the all the relevant, correct information. For example, a builder might think it’s a good idea to build houses in Memphis if more of these strategic defaulters were staying, yet the real demand (and prices) for housing there would not truly be reflected. A entrepreneur might think it’s a good idea to build a restaurant there if there were fewer foreclosed houses, but they reality does not capture the demand for new goods and services.
Ultimately, as much as you think society is better off by people being honorable, in business, it far more important to be upfront and honest.
The bizarre part is that you claim that a borrower has a burden to fulfill an obligation that is more stringent than what the creditor has proposed.
The creditor, who has generally written the contract, proposes various ways in which the contract may be legally ended. You’re saying that it is immoral to take the creditor up on the terms that he has proposed. That’s bizarre.
Stupidity is not the issue here. I think you are more morally obligated to pay something back to someone you could take advantage of because of their stupidity - basically not taking candy from babies. But the banks are not stupid in this sense, and are in fact smarter than their customers.
Say you refuse to do business with a certain bank, because their CEO supports Republicans or Democrats of Nazis or whatever. Maybe the bank is known for ripping off poor people. You choose to get a loan with a bank more to your liking. Now, that bank sells your loan to the bank you hate. You are certainly legally obligated to pay, and can maybe get out of the loan (though this isn’t always financially feasible) but isn’t there some reduction of ethical obligation here?
Hold on there. “Legally” ended? Walking away from the property isn’t a way to legally end the loan. It’s illictly breaking the contract and then not contesting the penalty. That’s a very different matter to me.
Go check out iamthewalrus(:3='s post on the last page. If it is a non-recourse loan, then the lender gets the property used to secure the debt, and the borrower has limited liability beyond the property used to secure the loan.
If the contract states that if party B stops paying, then party A gets the property, and party B has to move his shit out pronto; how is party B stopping payment illegal? There would certainly be legal issues if B stopped paying and refused to move out, but nobody is suggesting that would be legally or morally justifiable.
