Posted by: Timothy Ellis (The Tim)

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

221 responses to “On Misguided Ethics and Walking Away from a Mortgage”

These comments are paged! This is page 3. Navigate the pages here:
1 2 3
  1. DrShort

    By The Dude @ 191:

    By ME @ 190:
    A typical mortgage loan note is 3-4 pages. The first page and a half discusses the terms of the note and the repayment options. The remaining 2.5 pages discusses in detail the steps upon default…called the default remedies. Default remedy is part of the note. Part of the agreement. That means that defaulting is part of the contract. I hope I am clear on that.

    Mortgage loans also have an interest rate. It is technically called a “risk premium.” Take a guess on what the risk is. Default. Banks take risk into account. That is precisely why interest is charged on home loans and virtually any other type of bond.

    Thanks for the post — this was very enlightening. Assuming the banks accounted for the possibility you would strategically default when they set the interest rate, then I see nothing unethical in doing so. You are just exercising the option you paid for.

    Yeah. Very enlightening. But also completely wrong.

    Rate this comment: Thumb up 0

  2. DrShort

    By Scott Weitz @ 193:

    RE: ME @ 190

    Great post.

    Every contract written is written with the understanding that it may be breached. That’s why there are ‘default provisions and damages provisions’.

    And every contract is written with the understanding that the parties will make good faith efforts to not breach.

    Rate this comment: Thumb up 0

  3. Sci Ry

    RE: ME @ 190 – Why should anyone on this website be taking ethics lessons from a banker is beyond me.

    First, the original question was about STRATEGIC defaults, not defaults due to hardship.

    Let me ask this question: when housing prices were rising around the country, how many times did bank decide to break the contract and foreclose. How many banks decided, “well, we could make more money by not accepting payments and kicking the borrowers out of the house, and sell it to someone else”? If you can break the contract because the house price goes down, why can the bank break the contract when the price goes up? It just a contract right.

    People do not have ethics because the financial benefits, people have them in spite of them.

    Rate this comment: Thumb up 0

  4. ME

    Many people are under the failed assumption that the borrower is responsible for the collateral’s value stability.

    Completely untrue. The lender makes a loan commitment based only on a snapshot in time…at the time of the loan application.

    All kinds of evens can unfold during the tenure of the loan contract. Death, illness, appreciation, depreciation, bank failure, you name it.

    It is not the borrowers responsibility to maintain the properties value. It is the lenders responsibility to accuratly guage it. The lender takes the risk, not the borrower. Once a loan closes, the lender has zero options. They must take the payments, regardless of the value of the collateral, or of the current economic conditions.

    The borrower on the other hand holds all the cards. They can pay the payment. They can pay more than the payment. They can skip a payment. Thay can move. They can sell. They can rent it out. They can walk and get foreclosed. The bank can only react to the borrower.

    Why. Becasue of the contract. The contract matters. Is it unethical that the borrower has all the choices. Of course not. That is what the parties agreed to.

    So if one of the parties agrees to excercise their contractual right how is it unethical. The contract actually staes the term is for a specified period. If you sell or refinance, you are not paying for the entire term, thereby shorting the lender their full term interest payments. Is that ethical?

    Of course not.

    Rate this comment: Thumb up 0

  5. Lars

    By Sci Ry @ 203:

    RE: ME @ 190 – Why should anyone on this website be taking ethics lessons from a banker is beyond me.

    First, the original question was about STRATEGIC defaults, not defaults due to hardship.

    Let me ask this question: when housing prices were rising around the country, how many times did bank decide to break the contract and foreclose. How many banks decided, “well, we could make more money by not accepting payments and kicking the borrowers out of the house, and sell it to someone else”? If you can break the contract because the house price goes down, why can the bank break the contract when the price goes up? It just a contract right.

    I have no doubt that if banks could legally do that, they would. Also, it seems you fail to acknowledge that there’s a difference between “breaking” a contract, i.e. completely disregarding its terms vs. ending it by following a certain procedure that’s outlined in the contract.

    Rate this comment: Thumb up 0

  6. ME

    Dr. Short.

    Not wrong, but nice try . And the good faith is applicable only at the time of inception (application) not commencement.

    Sci Ry.

    Cute on the banker ethics lesson comment. The fact I am a banker, yet I side with the borrower should give you some insight on how witty your thoughts really are.

    Regardless, let me help you out. The reason for the default does not matter. Only that it happens. Strategic, Tragic, Voluntary. Doesn’t matter. Just like why you can pay or where the money came from doesn’t matter, why you can’t pay or where the money is no longer coming from doesn’t matter either. What matters is the situation, not the reason.

    And as I said before, no one is breaking the contract. Banks cannot break the contract and not accept payments, because that option is not written into the agreement. And the agreement does not state that the lender shares in the profits. They are not an owner, only a leinholder.

    As I said before (I thought fairly clearly) not paying is not breaking the contract. It only enforces the second provision of that exact contract. The default remedies. Which usually lead to foreclosure. Foreclosue is not breaking the contract. Quite the opposite, it is specifically due to the contract still being valid and enforceable that foreclosure can even commence. Of course the bank can file a defiency in certain states under many circumstances, but that is not the point.

    The question was is walking away unethical. When two consenting parties make an agreement, even when part of that agreement dictates how the agreement will end, then excersing the ending of the agreement is not unethical. It was agreed to in writing at the onset of the agreement.

    Rate this comment: Thumb up 0

  7. Lars

    By DrShort @ 202:

    By Scott Weitz @ 193:
    RE: ME @ 190

    Great post.

    Every contract written is written with the understanding that it may be breached. That’s why there are ‘default provisions and damages provisions’.

    And every contract is written with the understanding that the parties will make good faith efforts to not breach.

    You don’t breach a contract when you follow the terms outlined in it, e.g. the terms and procedures in the event of non-payment of a mortgage loan.
    Take this analogy: You buy a laptop at a computer store. The receipt says you can return it within 90 days if you pay a 15% restocking. A week later the laptop’s price drops by 50%. Would it be unethical to return the laptop, get a refund of 85% of the original price and turn around and buy a new one? After all you’re “breaking” the implied-in-fact contract you made when you first bought it.

    Rate this comment: Thumb up 0

  8. Tom

    Sad that there are so many people who are apparently completely unfamiliar with the concept of “a man’s word is his bond.”

    Rate this comment: Thumb up 0

  9. DrShort

    By Lars @ 205:

    Take this analogy: You buy a laptop at a computer store. The receipt says you can return it within 90 days if you pay a 15% restocking. A week later the laptop’s price drops by 50%. Would it be unethical to return the laptop, get a refund of 85% of the original price and turn around and buy a new one? After all you’re “breaking” the implied-in-fact contract you made when you first bought it.

    The difference is that you can return the laptop and still be in compliance with the terms of the sale. A foreclosure occurs when you have specifically broken the terms of the agreement. (ie, “I promise to pay…”)

    The better analogy is that you get married with a prenup. And the prenup states that if the husband cheats, the wife gets the house. That doesn’t make it an open relationship. And it doesn’t make the husband’s cheating ethical if she gets the house.

    Rate this comment: Thumb up 0

  10. Sniglet

    A foreclosure occurs when you have specifically broken the terms of the agreement.

    No. A foreclosure is actually just the execution of the agreement. The loan agreement says that the borrower has the choice of making the payments or giving their house to the lender. If the borrower decides to let the bank take over the home then they are still in perfect compliance with the contract.

    Like I said earlier, it’s no different than taking a ring to the pawn shop and then defaulting on the payments, thereby allowing the pawn shop to sell the ring.

    Rate this comment: Thumb up 0

  11. DrShort

    By Sniglet @ 207:

    The loan agreement says that the borrower has the choice of making the payments or giving their house to the lender.

    You realize that foreclosure is a remedy for default, correct? And you also realize the definition of default is failing to live up to an obligation?

    Rate this comment: Thumb up 0

  12. Jonness

    By Kary L. Krismer @ 174:

    All ethics are in their basic form are the social norms, so of course it’s social brainwashing. You’re just saying you don’t want to be ethical in making financial decisions. That’s very risky. I knew someone who thought and acted that way and they ended up in jail for financial crimes. There’s a risk to totally ignoring social norms.

    What is more risky:

    1) Thinking logically about financial decisions and choosing the path that serves your best interest according to law?

    2) Making financial decisions based on guilt, shame, obligation, and fear of what the neighbors think?

    I choose to practice 1). IMO, practicing 2) is mentally unhealthy and often leads to weeping and gnashing of teeth.

    Rate this comment: Thumb up 0

  13. Nelson

    By Jonness @ 212:

    By Kary L. Krismer @ 174:
    What is more risky:

    1) Thinking logically about financial decisions and choosing the path that serves your best interest according to law?

    2) Making financial decisions based on guilt, shame, obligation, and fear of what the neighbors think?

    One can make logical decisions within a moral framework. This is my logical financial decision: My conscience and my word is worth a lot more than the money I owe.

    Rate this comment: Thumb up 0

  14. Naive Spotter

    Is it a crime to preserve your own wealth when the business model that you participated in was intentionally manipulated to lose your wealth?

    I say — not only walk away, but be a bit more aggressive than that and go out of your way to remove from power those private individuals who own our central banking system worldwide.

    Rate this comment: Thumb up 0

  15. exconsumer

    For those of you who insist that the borrower promised to pay . . . you are incorrect. The borrower promises to pay – OR GIVE UP THE HOUSE – and it has always been thus. That’s what collateral is. Ethics and morality don’t enter into the discussion. Unless you define immoral or unethical as ‘executing a legal option that is not in the lender’s best interest’.

    Rate this comment: Thumb up 0

  16. Sci Ry

    If I start working for an employer and sign a statement that I will “do X”, and that if I “don’t do X, there will be penalties, such as fines or prosecution”, that does not give me the ethical choice to do X or not. The company obviously wants we to do X (let’s say X is to protect other people’s identities), and has not given me a pass to do the opposite as long as I am willing to pay the price. That company probably will check my credit history to make sure that I am trustworthy, i.e. able to act in good faith, and have not decided to purposely default on loans.

    Similarly, one the unwritten social contract, it is wrong to kill or steal, and just because there is a remedy for it, does not condone it or make it ethical.

    And just because foreclosure is included as a remedy for not paying back the money someone borrowed you, it does not absolve it from being unethical. Obviously, each person’s tipping point of where this falls on the scale of ethics is different, but I would love to see people have to “wear” their ethics for everyone else to see.

    Finally, ALL corporations, banks, oil companies, etc. are legal entities devoid of ethics and morals, and should not be considered “people”. I will not allow them to set my moral standards.

    Rate this comment: Thumb up 0

  17. Tasser

    Was it ethical for the lenders to create and approve crap loans to people who never should have been approved in the first place? We sold one house in Chicago and bought another during the height. The move was necessary due to a change in employment, otherwise my commute would have been double what it is at the new house. We had about 15% down on the new house. Now, values have plummeted so much that our house is worth $100K less than it was when we bought 5 years ago, despite the $20K we put into it. We now find ourselves $80K in the hole. Is it unethical to sell the house for what we can? I have a lot of pride and have never gone back on anything, but I really don’t see the people who caused this doing anything but putting the problem on the backs of those who are creditworthy.
    We tried to talk to our lenders about an adjustment, and basically we were told since we are not behind or getting a divorce, tough luck. Really? I am disgusted and saddened that everything we have worked for for 10 years has gone down the drain because of greed and stupidity on the part of others.

    Rate this comment: Thumb up 0

  18. Andre

    When you walk away, you were still paying the mortgage until the last month before you left your home. The bank is not going through a legal process which cost often exceeds the value of the house, but that the bank must follow (unless a short sale makes sense) in order to repossess and sale. In the end, following a “normal” foreclosure process is going to cost the bank a lot more than a homeowner walking away the first month he is going to default, forfeiting the house to the bank without any legal costs to the bank other than repossession.
    Walking away is a lot more ethical than foreclosing. You stand up to your situation, accept your mistake of buying at the peak (or refinancing to no end), and take the only logical action of your situation. You are a responsible person that made a judgment mistake and decently deals with it.

    Of course a society build on debt is going to teach you exactly the opposite. My thumbs up to Tim for, once more, showing a critical mind unobstructed by fake ethics.

    Rate this comment: Thumb up 0

  19. Brady

    DrShort has won this argument.

    Rate this comment: Thumb up 0

  20. On the Radio: Walk Aways and Puyallup Condos • Seattle Bubble

    [...] in with your comments and questions. Although I’ve made my position on this issue pretty clear here in the past, my main role on the program today will be to address the overall issue from a [...]

    Rate this comment: Thumb up 0

  21. Seattle Bubble • Dori Monson Tackles Walking Away from Your Mortgage

    [...] same argument about the ethics of walking away that I made in this pair of posts from a year ago:On Misguided Ethics and Walking Away from a MortgageDid Banks Act in Good Faith During the Bubble?I mostly agree with Howard’s comments on the [...]

    Rate this comment: Thumb up 0

These comments are paged! This is page 3. Navigate the pages here:
1 2 3

Leave a Reply

Do you want a nifty avatar picture next to your name, instead of a photograph of Tim's dog? Just sign up with Gravatar, and make sure to use the same email address in the form below. It's that easy!

Please read the rules before posting a comment.

You have 3 comments remaining on this post.

Archives

Find us on Google+