On Misguided Ethics and Walking Away from a Mortgage

CBS 60 Minutes - Mortgages: Walking Away

With the subject of “walking away” finally hitting the mainstream media in full force this weekend with a dedicated segment on Sunday’s 60 Minutes, it would appear that the idea of giving the keys back to the bank to get out of a financial death spiral continues to gain some serious traction.

Of course, even though walking away would massively improve their financial situation and should be a no-brainer for many people (several such people are profiled in the 60 Minutes segment), strategic default (choosing not to pay your mortgage even though you can afford to) still carries something of a social stigma in many people’s minds.

For example, “walking out on a mortgage” was recently listed among “8 money missteps” by USA Today, which was then repeated without question and escalated to a “financial deadly sin” by my favorite personal finance blog, Get Rich Slowly (P.S. – buy J.D.’s book). Here in my neck of the woods, Kenmore real estate agent James Lupori called the notion “disturbing” in a recent post.

However, while some individuals may still be fretting about their “moral obligation” to pay their mortgage, a growing number of recent high profile examples have demonstrated that strategic default is really nothing more than a smart business decision.

In January, the owners of the massive 11,227-unit Stuyvesant Town and Peter Cooper Village apartment complex in Manhattan announced they would be handing the property over to their creditors. Closer to home, Boston-based Beacon Capital Partners announced last month that they will be intentionally defaulting on the $2.7 billion loan that they used to buy the Columbia Center—Seattle’s tallest skyscraper—and 8 other towers in the Seattle area (as well as 11 in the DC area).

“We’re seeing a lot of these ‘strategic defaults,'” said Ben Thypin, senior market analyst with Real Capital Analytics, a commercial real-estate research firm in New York. “Beacon could probably pay the mortgage, but the properties are worth less now, and they don’t want to make payments based on outdated values.”

If you’re one of the people that is still not convinced that walking away is a strictly business decision in which ethics and morals should not even enter the conversation, allow me to point you toward an excellent pair of recent papers by Brent T. White, legal professor at the University of Arizona: “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” and “Beyond Guilt in the Housing Crisis: The Morality of Strategic Default.”

Here’s a particularly compelling passage from the second paper that specifically addresses the lack of any moral component in the decision to walk away:

Think of it this way: when you got your cell phone, you likely signed a contract with your carrier in which you “promised” to pay a set monthly payment for two years. Let’s say, though, that two months after you sign your contract, the price of cell phone service drops by half – meaning that the same cell phone service you pay $100 a month for could be had for half of that with another carrier. You decide that you would be financially better off paying the early termination fee of $300, rather $100 a month for another 22 months for the same service that you can now get for $50.

Would it be immoral for you to break your contractual “promise” to pay $100 for two years, and elect instead to pay the early termination fee? Of course not. The option to breach your “promise” to pay is part of the contract, as is the consequence of breach – a $300 early termination fee. There is absolutely nothing immoral about exercising your option to breach, and you’d be financially wise to do so.

Though a mortgage contract is more substantial, and involves a home, it is simply a contract, just like a cell phone contract. Like a cell phone contract, a mortgage contract explicitly sets out the consequences of breach.

In other words, the lender has contemplated in advance that the mortgagor might be unable or unwilling to continue making payments on his mortgage at some point and has decided in advance what fair compensation to the lender would be. The lender then wrote that compensation into the contract. Specifically, the lender probably included clauses in the contract providing that the lender may foreclose on the property, keep any payments that have been made, and may opt to pursue a deficiency judgment against the mortgagor, if state law so allows.

By writing this penalty into the contract, and then signing the contract, the lender has agreed to accept the property, and (in most states) the option to pursue a deficiency judgment, in lieu of payment. Of course, even in states where they can, lenders frequently don’t pursue borrowers for deficiency judgments because it’s often not economically worthwhile to do so.

Nevertheless, that’s the agreement. No one forced the lender to sign that contract. Indeed, they wrote it. And, to be sure, the lender wouldn’t hesitate to exercise their right to take a person’s house if it was in their financial interest to do so. Concerns of morality or social responsibility wouldn’t be part of the equation.

In short, as far as the law is concerned, choosing to exercise the default option in a mortgage contract is no more immoral than choosing to cancel a cell phone contract. The borrower just has to be willing to accept the consequences – which, in the case of a mortgage contract, typically include being subject to foreclosure and, in most states, the risk of a deficiency judgment.

Banks and corporations like Beacon Capital Partners understand what Mr. White is talking about here, that a mortgage is merely a legal contract, not some sort of sacred vow. They will continue to do what is in their best financial interests, and you should too.

If you find yourself in a situation where you have run the numbers every way you can and the best decision for your family’s financial future is to walk away from your mortgage, don’t let a misguided sense of ethics lead you to the wrong decision. Continuing to pay a mortgage that is hopelessly underwater is throwing good money after bad. If you already made the mistake of buying a massively overpriced house, that doesn’t mean you need to continue paying for that mistake for the next twenty years when there exists a way out.

Please note that this post is absolutely not intended to be legal advice. If you are considering walking away, it is imperative that you seek experienced legal council that can fully explain the legal ramifications of strategic default in your specific state or municipality.

It has been a couple of years since we last ran a poll on this subject, so here’s a new poll:

Should ethics/morals come into play when deciding whether to walk away from a mortgage?

  • Yes. (24%, 187 Votes)
  • No. (71%, 561 Votes)
  • I don't know. (6%, 46 Votes)

Total Voters: 793

[Continue Reading – Part 2: Did Banks Act in Good Faith During the Bubble?]

  

About 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 comments:

  1. 1
    The Tim says:

    I would also like to add that I have never personally defaulted on any debt, and in fact I do my best to avoid taking on debt at all. Since I still haven’t bought a house yet, I am currently living 100% debt-free, which I highly recommend for everyone.

    I also consider myself to be a very moral and ethical person, and in fact have turned down or neglected to pursue a variety of money-making opportunities because I believed them to be unethical or immoral.

    Furthermore, as most of you probably know, I have little to no pity for people who knowingly saddled themselves with a massive debt to buy some dumpy shack during the housing bubble mania.

    All that being said though, I still have yet to see a compelling argument that ethics should even enter into the conversation when discussing whether or not to pursue strategic default.

    Note that I am just talking about the financial action in this post, not the decision that some people have made after they stop paying their mortgage to continue living in the home as long as possible. I absolutely believe that there are serious ethical questions when it comes to that aspect of strategic default.

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  2. 2

    First, I would never cite to 60 Minutes for any proposition. They are not a credible source of news because of their practice of biased “pick a side and promote it” journalism.

    Second, I already have addressed Prof. White’s piece at length, but it’s amazing that a law professor can write such a lengthy piece without citing much, if any, law.

    http://blog.seattlepi.com/realestate/archives/186598.asp

    Third, what tends to be really overlooked in the walk away discussion is the fact that many/most of the really underwater people have a second mortgage, and they’re not likely to walk away from that, at least in Washington. 80/20 loan packages were very popular prior to the peak as people then either ignored or didn’t understand the additional risk of getting a second mortgage.

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  3. 3
    Dave0 says:

    How does being foreclosed on affect your credit score? I would think it would be a major hit that would take years to recover from. If I were in the situation where a strategic default is being considered, that would be a major concern to me.

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  4. 4
    BacktoBasic says:

    Is it ethic that bank evict you out and sell it to other higher bidders if the bank knew the house value more than your mortgage? Personally, I will never do business or loan money to anyone who walked away from legal contract. Trust is trust. I value personal reputation more than anything else.

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  5. 5
    The Tim says:

    RE: Dave0 @ 3 – My understanding is that it is a black mark on your credit for seven years, under the current system.

    However, anecdotally, it would appear that walking away doesn’t entirely ruin your chances of buying another home. My aunt, who walked away from a house in the Portland, OR area back in 2008 was able to subsequently turn around and buy a condo in the area, which she just unloaded (don’t know the details of how) a few months ago and moved back to Missouri, where she bought a decent home on 5 acres for around $100k.

    So apparently walking away isn’t a complete mark of death for your credit.

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  6. 6
    BacktoBasic says:

    RE: The Tim @ 5
    Sometimes, it’s not ethical to do things seems leaglly. Also sometime it is unlawful to do ethic thing. Walk away is legally allowed but not ethical.

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  7. 7
    wreckingbull says:

    RE: Kary L. Krismer @ 2 – Thanks Kary, that is very interesting. Most of my friends who went on real estate binges in the bubble years took 80-20s. Are they always on the hook for the secondary? How does this usually play out? Do first and second banks work together in some scenarios?

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  8. 8

    RE: wreckingbull @ 7 – There was a recent court case (last two years) in Washington that specifically held that the debt obligation on the second survives where the first forecloses. That had been assumed the case for years, but then there was an odd case involving the IRS that apparently put that result into question. Thus, what tends to happen is that the second won’t foreclose because they won’t get any other bidders, and not foreclosing allows them to pursue the debt later–often years later.

    There could be situations where they are not on the hook for the second, but those are probably the exception rather than the rule, and might require expensive litigation to determine the exception.

    I would once again mention that Chapter 13 can be a good way to deal with seconds where the property is worth less than the amount owing on the first (and other prior liens such as RE taxes). So although outside of bankruptcy those with an 80/20 are typically worse off, those same people can have better options in bankruptcy.

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  9. 9
    D. in Ballard says:

    I recently talked to a mortgage broker whose specialty is reverse mortgages. I’m paraphrasing very badly here, but he said that a lot of the banks are selling their mortgages to collection agencies. These agencies will wait until the person gets back on their feet after walking away from a mortgage and then ding them for the money. Is this true? Urban myth? Sounds awful.

    I should mention that this guy was a friend of a friend, and I wasn’t a prospective customer.

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  10. 10
    Ethics says:

    There is no universal standard for ethics- your ethics and mine would be widely different on many topics because of who we are and where we have been.

    However as more people on your street with ‘lower-ethical-standards’ than you keep on strategically defaulting on their mortgage- and you and your family start living amongst foreclosed signs- the case for defaulting would become stronger. It is the broken window theory in reverse :)

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  11. 11
    Magnolia44 says:

    Hmm, I was under the assumption and read purchase money second loans also went away in the case of foreclosure. Any link or someone who is truly in the know?

    As someone with a 800 credit score I must say if the hole got deep enough I would have no issues with mailing in the keys and saying thanks. There is nothing unethical about it, its part of the agreement. Individuals should be treated no different than a corporation in this case they do it all the time.

    Another $30-$50 k on top of the recent depriciation and this household may start thinking about it a little more. But for now we can live with the amount we are underwater and stick with the house.

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  12. 12

    By D. in Ballard @ 9:

    I recently talked to a mortgage broker whose specialty is reverse mortgages. I’m paraphrasing very badly here, but he said that a lot of the banks are selling their mortgages to collection agencies. These agencies will wait until the person gets back on their feet after walking away from a mortgage and then ding them for the money. Is this true? Urban myth? Sounds awful..

    That’s what they’ve done for decades on credit card debt, so I don’t know why mortgage debt would be any different.

    This is also an issue with short sales where the seller didn’t get proper legal advice.

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  13. 13

    By Magnolia44 @ 11:

    Hmm, I was under the assumption and read purchase money second loans also went away in the case of foreclosure. Any link or someone who is truly in the know?.

    I think that’s only in California. Down there refinancing apparently exposes you to more liability.

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  14. 14
    D. in Ballard says:

    RE: Kary L. Krismer @ 12 – Okay that’s good to know. You’re right. You have more options if you’re actually bankrupt, but if it’s just strategic it sounds like a big pain in the butt. On the other hand, if you’re down 50%, why not?

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  15. 15
    badquaker says:

    Banks have done their best to remove trust from the system, instead they have commoditized it into a FICO score. Since they are making a loan based on my FICO score instead of my credibility. why should I value paying a debt beyond my potential score hit? If I could sell 200 FICO points for $100k, I’d sign up in half a heartbeat.

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  16. 16
    drshort says:

    It’s completely unethical.

    1. A mortgage is a promise to pay. Just because it spells out remedies in case of default doesn’t remove the borrowers obligation to act in good faith.

    2. The comparison to the termination fee on a cell phone contract is absurd. Early termination of a cell phone isn’t breaking the contract. The early termination is spelled out as a legitimate option under the contract terns with a fee that covers the cell phone companies prepaid costs. Walking away from a mortgage is breaking the implied good faith and promises to pay.

    3. When someone walks away from a mortgage, they are directly transferring their debts to the greater public despite their promise to pay. How is that possibly ethical if they have the ability to fulfill their promise?

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  17. 17

    RE: D. in Ballard @ 14 – What I would recommend to people is to first see an attorney that is very familiar with mortgage related documents to review your entire file from escrow. There can be defects that create defenses. I would also get recorded copies of the documents for them to review so that they can determine that the deed of trust was properly “perfected.” At that point I would turn to a bankruptcy attorney for advice, one that is familiar with both Chapter 7 and Chapter 13, and/or an attorney familiar with loan modifications.

    What I would not do is walk away without proper legal advice. One of the most valuable rights that a homeowner has is the right to stay in the property, and without proper legal advice you might terminate that right earlier than necessary and/or have additional liabilities to deal with after you walk away.

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  18. 18
    BacktoBasic says:

    A mortgage is a promise. You are untrustworthy if you walk out and none will like to do business with you. You are also less hireable if you walk out of a house if i am an emplorer. Trust me, your employer do credit check before hiring you.

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  19. 19
    The Tim says:

    By BacktoBasic @ 18:

    You are also less hireable if you walk out of a house if i am an emplorer.

    Beware, underwater homeowners: If you walk away from your mortgage, you forfeit your future opportunities to be emplored by BacktoBasic.

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  20. 20
    HappyRenter says:

    By Ethics @ 10:

    There is no universal standard for ethics- your ethics and mine would be widely different on many topics because of who we are and where we have been.

    I think we need to distinguish between ethics and moral. As I understand it, ethics is something universal, like “you shall not steal” or “you shall not kill”. Moral is something defined locally and it has to do with the local culture. Is it morally accepted to walk away from your mortgage? I think it is in the US (even if the media try to convince you otherwise) because defaulting is culturally accepted in the US. It’s not accepted in Dubai where it’s brutally punished, but the culture there is different. So, whether walking away from your mortgage is acceptable or not depends on the local moral. That’s my 2 cents.

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  21. 21
    BacktoBasic says:

    RE: The Tim @ 5
    I know a murder walk on the street without any punishment. He walks on the street and people shake hand with him. He even made millions wrote a book “How did I get away from being a murder’. So apparently commit a high crime isn’t a complete mark of death for you.

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  22. 22
    drshort says:

    re:Tim — If you’re one of the people that is still not convinced that walking away is a strictly business decision in which ethics and morals should not even enter the conversation, allow me to point

    From a “strictly business” stand point, it might make sense to:

    1. Dump my trash in the woods instead of paying $40 a month for garbage service.
    2. Pour my used motor oil and antifreeze down the drain rather than bring it to a recycling center.
    3. Steal my neighbor’s newspaper rather than getting my own subscription.

    The thing about morals and ethics is that you can’t “remove them from the conversation.” They’re part of every decision.

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  23. 23
    The Tim says:

    I mentioned above @ 1 that I have yet to see a compelling argument that ethics should even enter into the conversation when discussing strategic default. So far that is still the case.

    The arguments presented by BacktoBasic @ 6 and drshort @ 16 seem to basically boil down to “it is unethical because it just is.”

    100 years ago when you got a mortgage loan from your local Bailey Building and Loan Association where your lender actually gave a RA about who you were and your personal well-being, I could maybe buy the ethical “promise” argument.

    But in today’s world where you are nothing more than numbers in a spreadsheet to a bank that originates a loan then immediately turns around and sells it to some other entity that slices and dices it into all manner of collateralized debt obligations and mortgage-backed securities, I’m not buying it.

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  24. 24
    patient says:

    The people who excercise strategic defaults are not the villains here. They are just symptoms of the housing bubble which is the real villain. The bubble was enabled by reckless, greedy,incompetent lending. If you are looking for an outlet for your anger of declining home values or business look at what caused the bubble and not the symtpoms of it’s deflation. I find these poor attempts to make the strategic defaulters some kind of etchical and moral criminals and cast the blame on them tacky. My guess is that the majoirty of families that walks away have suffered sufficient to their stated “ethical crime” in terms of worries and complications involved in being under water. When they are relieved of the mortgage burden they can also start putting more money into the economy.

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  25. 25
    BacktoBasic says:

    By The Tim @ 5:

    RE: Dave0 @ 3 – My understanding is that it is a black mark on your credit for seven years, under the current system.

    However, anecdotally, it would appear that walking away doesn’t entirely ruin your chances of buying another home. My aunt, who walked away from a house in the Portland, OR area back in 2008 was able to subsequently turn around and buy a condo in the area, which she just unloaded (don’t know the details of how) a few months ago and moved back to Missouri, where she bought a decent home on 5 acres for around $100k.

    So apparently walking away isn’t a complete mark of death for your credit.

    RE: The Tim @ 5

    Since you aunt seems walked away from her house w/o personal loss at the cost of banks or tax payers. And you are saying this is nothing wrong with this. I hope you won’t teach your kids this. Did you aunt taught you this is right thing when you were young? Dinner table education is very important in America.

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  26. 26
    The Tim says:

    By drshort @ 22:

    From a “strictly business” stand point, it might make sense to:

    1. Dump my trash in the woods instead of paying $40 a month for garbage service.
    2. Pour my used motor oil and antifreeze down the drain rather than bring it to a recycling center.
    3. Steal my neighbor’s newspaper rather than getting my own subscription.

    And how are any of those things even remotely analogous to walking away from one’s mortgage? We’re talking about a structured financial transaction in which each possible course of action for each party has specific, legally-defined outcomes.

    Each of your examples involves a criminal element as well as a direct detrimental outcome on others. If I have an underwater mortgage that I decide to walk away from, that is between me and the bank. I’m not depriving someone else the use of any of their rightful resources.

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  27. 27
    BacktoBasic says:

    By The Tim @ 26:

    By drshort @ 22:
    From a “strictly business” stand point, it might make sense to:

    1. Dump my trash in the woods instead of paying $40 a month for garbage service.
    2. Pour my used motor oil and antifreeze down the drain rather than bring it to a recycling center.
    3. Steal my neighbor’s newspaper rather than getting my own subscription.

    And how are any of those things even remotely analogous to walking away from one’s mortgage? We’re talking about a structured financial transaction in which each possible course of action for each party has specific, legally-defined outcomes.

    Each of your examples involves a criminal element as well as a direct detrimental outcome on others. If I have an underwater mortgage that I decide to walk away from, that is between me and the bank. I’m not depriving someone else the use of any of their rightful resources.

    RE: The Tim @ 26
    If you borrow your co-worker’s money and intended not to paying it back. Is this a pure two person business or other?
    Your intention in this forum is very clear: to catch the fish (cheap house) in a muddy water (regardless of moral standard), don’t you?

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  28. 28
    drshort says:

    By The Tim @ 23:

    I mentioned above @ 1
    The arguments presented by BacktoBasic @ 6 and drshort @ 16 seem to basically boil down to “it is unethical because it just is.”

    No. It’s nothing more than economic pollution.

    It’s unethical to break a promise because you no longer like the terms of the agreement. It doesn’t matter that the bank doesn’t care about you.

    It’s unethical to transfer your debts to your neighbors. Ultimately, that underwater mortgage is going to be paid by someone. Most likely Freddie and Fannie — which means the tax payers will pay it. And you damage your immediate neighbors.

    Your argument appears to be 1) banks are jerks and 2) it makes financial sense for me. I don’t see how that makes it ethical or moral.

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  29. 29
    joe dirt says:

    It used to be shameful to have (or be) a bastard, no doubt the stigma of foreclosure shall be a thing of the past as well, and those who question it will be viewed as old fuddy duddys

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  30. 30
    The Tim says:

    By drshort @ 28:

    It’s unethical to break a promise because you no longer like the terms of the agreement. It doesn’t matter that the bank doesn’t care about you.

    It absolutely does matter. It’s not a “promise,” it’s a contract. I make promises with people I know. I make contracts with faceless corporations that by definition will only be operating in their own best financial interests.

    If you walk away, you’re not “breaking a promise because you no longer like the terms of the agreement,” you are in fact following the specific terms of that agreement. Now, if you stop paying but try to keep the house, that would be a different thing. But we’re talking about someone who stops paying and moves on.

    It’s unethical to transfer your debts to your neighbors. Ultimately, that underwater mortgage is going to be paid by someone. Most likely Freddie and Fannie — which means the tax payers will pay it. And you damage your immediate neighbors.

    What the bank chooses to do with a house and the related debt after it is relinquished to them is their problem, not the borrower’s, as defined by the agreement that both parties signed.

    I agree completely that the bad debt should not be passed off onto taxpayers, but that’s something we should be going after the banks and the government for, not the home debtors who walk away.

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  31. 31
    Ryan says:

    The argument that it is unethical to walk away and thus transfer this burden to others (taxpayers, banks, etc) is ridiculous. Between all of the gov’t giveaways including unemployment, bailouts for all banks, bailouts for foreign banks, etc. I could care less about my neighbor or anyone else for that matter. Honestly, I think it is almost an obligation to stick it to the banks anyway you can.

    I have an 80/20 and it is unfortunate that you can not walk away from the 2nd like you can in the State of CA (assuming the 2nd is part of the original purchase). I am on the hook for that personally although if house prices take a big tumble here in the next few years I will certainly evaluate whether it is worth just moving to Chapter 13. I can afford my home currently and I have not bought more home than I can afford but I refuse to let emotion blur the reality that it is just business.

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  32. 32
    D. in Ballard says:

    A similar thread was begun on Redfin a couple of months ago. There are literally hundreds and hundreds of comments and no one is convincing anyone else of anything.

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  33. 33
    The Tim says:

    RE: D. in Ballard @ 32 – But that doesn’t mean it isn’t fun. ;^)

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  34. 34
    drshort says:

    By Ryan @ 31:

    The argument that it is unethical to walk away and thus transfer this burden to others (taxpayers, banks, etc) is ridiculous. Between all of the gov’t giveaways including unemployment, bailouts for all banks, bailouts for foreign banks, etc. I could care less about my neighbor or anyone else for that matter. Honestly, I think it is almost an obligation to stick it to the banks anyway you can.

    This is the exact same justification looters use when there is a catastrophe. The world is unfair and everyone else is doing it, so I will too!

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  35. 35
    David Losh says:

    RE: The Tim @ 1

    My ethical dilemma is giving banks money. Banks have asked for and now gotten global relief from debt obligations, yet they pursue others into default. Banks, lenders, and financial markets have mercilessly raised interest rates by trickery. They sent you a notice your interest rate was going up so now, legally, you have to pay a higher rate on your credit cards. Credit drove the price of all commodities up, gave the appearance of a robust economy, and then at the slightest hint there may be a problem, they start a dumping on the world governments.

    I’m sorry, I have a persona problem any time I give a bank a dime of money, but I do.

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  36. 36
    drshort says:

    By The Tim @ 30:

    If you walk away, you’re not “breaking a promise because you no longer like the terms of the agreement,” you are in fact following the specific terms of that agreement.

    The agreement is that you will act in “good faith” to fulfill the terms of the agreement. When you purposely default, you are not acting in good faith and you are breaking the agreement.

    You seem to think a mortgage is an “option” contract.

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  37. 37
    LeftOverpricedSeattle says:

    By The Tim @ 26:

    If I have an underwater mortgage that I decide to walk away from, that is between me and the bank. I’m not depriving someone else the use of any of their rightful resources.

    So, you defaulting on your obligation doesn’t have a “direct outcome” on the “rightful resources”, in this case, money, of the stockholders (or CDO owners) when the bank’s stock (or CDO value) falls to zero because you, and others like you, didn’t pay your obligation?

    How about the customers who have to pay higher and higher fees because of your decision? Isn’t that taking their “rightful resources”, in this case, money, as well?

    I guess the first question really should be whether you think we should consider it to be criminal fraud when someone strategically defaults (e.g can pay, but won’t pay).

    We all know the world is morally and ethically bankrupt. If it weren’t, we wouldn’t be constantly trying to pass more and more laws to stop people from doing things that are ethically and morally wrong.

    The second question is, what stops you from stealing? Ethics and morals, or just because it is against the law to do so? Sounds to me that you believe that stealing, if it weren’t illegal to do so, would just be a smart financial business decision on your part.

    Hey, guess what, Tim, you should see about legalizing drugs so you can have a new career as a drug dealer. After all, those kids should realize that it’s just a business decision on your part to get them hooked on drugs. If they agree to buy them, which is a business contract between two people, then why should you care if they end up dead from it because ethics shouldn’t enter into it, right?

    Remember, you have to teach a five year old child to tell the truth, but you don’t have to teach them to lie.

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  38. 38
    ray pepper says:

    RE: patient @ 24

    Outstanding Statement and RIGHT ON TARGET!

    Those who that continue to condemn, with all that we know that Wall Street orchestrated on the World, remain incurabley incompetent.

    If you are upside down greater then 20%, plus the cost to sell in Washington State of about 10%, and plan on selling in the next 7 years I urge you to educate yourself NOW instead of crying to everyone later.

    My contention is that those who continue to pay (in the above scenario) based on moral obligations, are the ones that truly have not been educated as to what was orchestrated upon them.

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  39. 39
    The Tim says:

    By LeftOverpricedSeattle @ 37:

    So, you defaulting on your obligation doesn’t have a “direct outcome” on the “rightful resources”, in this case, money, of the stockholders (or CDO owners) when the bank’s stock (or CDO value) falls to zero because you, and others like you, didn’t pay your obligation?

    How about the customers who have to pay higher and higher fees because of your decision? Isn’t that taking their “rightful resources”, in this case, money, as well?

    As Mr. White explained in the quoted excerpt in the post:

    …the lender has contemplated in advance that the mortgagor might be unable or unwilling to continue making payments on his mortgage at some point and has decided in advance what fair compensation to the lender would be. The lender then wrote that compensation into the contract.

    So how exactly is it the fault of the strategic defaulter that the lender inaccurately assessed their risk? Again, isn’t that the lender’s problem, not the borrower?

    The second question is, what stops you from stealing? Ethics and morals, or just because it is against the law to do so? Sounds to me that you believe that stealing, if it weren’t illegal to do so, would just be a smart financial business decision on your part.

    Hey, guess what, Tim you should see about legalizing drugs so you can have a new career as a drug dealer. After all, those kids should realize that it’s just a business decision on your part to get them hooked on drugs. If they agree to buy them, which is a business contract between two people, then why should you care if they end up dead from it because ethics shouldn’t enter into it, right?

    Again, both of these examples (stealing & selling drugs) involve direct detrimental effects on others, and are therefore in my opinion plainly unethical and immoral. I have never argued that laws are the determining factor in whether something is okay to do or not.

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  40. 40
    Magnolia44 says:

    Lmao at people taking the banks side. An industry that preys on the weak with fees and high interest rates. Why do u think those of us who have the 9 % credit cards and easy credit have it?

    Because they prey on the poor whoi are paying 20 and 30%. Period the indiustry is scum, they developed it this way.

    Only debt I have is the house, credit card debt no more. Keep feeling sorry for an industry that is just really unspeakable.

    Anyway there may be none of this in 5 years if the country collapses under the debt and massive ponzi scheme that exists today. Its all a joke folks get in where you fit in.

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  41. 41
    tomtom says:

    By BacktoBasic @ 27

    If you borrow your co-worker’s money and intended not to paying it back. Is this a pure two person business or other?

    Even pawn brokers know better than give unsecured loans. Your analogy is flawed.

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  42. 42
    ray pepper says:

    For anyone needing assistance in making their decision going foward your education should begin here:

    http://vimeo.com/3261363

    then:

    http://www.youwalkaway.com/output24/InterectiveFlashCalculator.html

    then:

    http://www.500realty.net/strategicdefault.php

    Always look for whats in the BEST interests of your FAMILY! Nobody else will!

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  43. 43
    query_squidier says:

    I answered “I don’t know” to the question and frankly, I really don’t. I’d have to be unfortunate enough to be in an underwater mortgage with no other options to even contemplate a strategic default. That said, my upbringing, financial track record, and personal honor system would definitely sway me away from pursuing a strategic default. That also said, The Tim is making some very persuasive and solid arguments in favor of that as an option.

    But, any way you look at it, banks are bastards, which is why I love me my ♥♥♥ Verity Credit Union ♥♥♥ !

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  44. 44
    Magnolia44 says:

    Ray,

    You would know are purchase money second loans non recourse in the state of WA?

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  45. 45
    The Tim says:

    By the way, I should point out that to some degree I posted this and am active in the conversation here today because I find it entertaining to occasionally engage in a spirited argument on a topic that people have strong opinions about. I expected a bit of a heated discussion, and I have not been disappointed. :^)

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  46. 46
    The Tim says:

    By query_squidier @ 43:

    But, any way you look at it, banks are bastards, which is why I love me my ♥♥♥ Verity Credit Union ♥♥♥ !

    Whoa, I did not know that ♥ was an HTML entity. Nice. Agree 100%. Credit unions FTW. I do my banking at Prevail CU.

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  47. 47
    drshort says:

    By The Tim @ 39:

    Again, both of these examples (stealing & selling drugs) involve direct detrimental effects on others, and are therefore in my opinion plainly unethical and immoral. I have never argued that laws are the determining factor in whether something is okay to do or not.

    Follow the money after someone defaults. The banks aren’t the one’s that end up having “direct detrimental effects” — it’s the taxpayers, stockholders, pension plans, and neighbors.

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  48. 48
    D. in Ballard says:

    RE: The Tim @ 33 – We are so different.

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  49. 49
    The Tim says:

    By drshort @ 47:

    Follow the money after someone defaults. The banks aren’t the one’s that end up having “direct detrimental effects” — it’s the taxpayers, stockholders, pension plans, and neighbors.

    And that is the banks’ fault for not properly assessing (or often knowingly misrepresenting) the risk in the first place.

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  50. 50
    LA Relo says:

    Walking away should only be done if you have no other choice. Leaving because your equity didn’t triple like your realtor promised is wrong. Leaving because you have no choice, lost a job, have to move in with family or hit the streets is different, but you have to face the consequences.

    The shirking of responsibility in this country sickens me. I think that’s the real issue. Walking away basically because you “feel” like it is wrong. If you have no choice that’s one thing; I think foreclosures are a solution, but don’t complain about banks getting bailed out if your NOD is part of the reason they “need” taxpayers’ money.

    I understand a lot of us here want a correction in prices, but encouraging people to walk away will only encourage more gov’t bailouts.

    People and companies need to be held responsible for their choices.

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  51. 51
    Sniglet says:

    I don’t think there is ANYTHING wrong with “walking away” from a mortgage, either morally or ethically. Of course, walking away only makes sense if you will absolutely wind up in a much better financial situation as a result. If the lender can still pursue you to make good on the losses, then clearly walking away might not be an option. As people have said before, individuals need to consult a lawyer to see if this makes sense in their situations.

    That said, there is “walking away” and “walking away”. It might make sense for someone who is in a financially sound situation to decide to stay in their home, and continue to make mortgage payments, even if they are deeply under-water. However, a home-owner who is really struggling to make ends meet should give very serious consideration to defaulting. Even if your lender is willing to make a mortgage modification to help, it just doesn’t make sense for your family, or even the broader economy, for you to keep hanging on by a thread.

    Let’s face it, the vast majority of people who manage to get loan modifications end up re-defaulting anyway. This doesn’t help anyone. It is far better for people in this situation to just throw in the towel and re-adjust their family expenses (i.e. by finding a cheaper place to rent). Delaying the inevitable isn’t a good idea for lenders either, so mailing in the keys is good all round.

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  52. 52

    RE: ray pepper @ 42 – I can’t imagine what would compel you to put a strategic default page on your website. No good can come from that. Do you also have a page on how to make bombs? ;-)

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  53. 53

    By Magnolia44 @ 44:

    Ray,

    You would know are purchase money second loans non recourse in the state of WA?

    Ray is not a lawyer. The deed of trust statutes can be found here:

    http://apps.leg.wa.gov/rcw/default.aspx?cite=61.24

    I don’t believe you’ll find a thing indicating that purchase money makes a difference.

    I have to run out, but I believe just about everything you need to know is covered here:

    http://apps.leg.wa.gov/rcw/default.aspx?cite=61.24.100

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  54. 54

    RE: D. in Ballard @ 9
    This does sound awful, I dont understand how this can be ethical or even legal?

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  55. 55
    LA Relo says:

    I actually started editing what I said after I posted. The more I think about it I’m torn. The “rules don’t apply to me” mindset of today bothers me.

    To a degree this makes me say walking away is wrong particularly if you can afford payments. But I also can’t help but think this will give the banks to get what they deserve and bring prices back to reality. But will it? Won’t we just see more gov’t bailouts? Too much to think about, gotta get back to work.

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  56. 56
    Sniglet says:

    I can’t imagine what would compel you to put a strategic default page on your website. No good can come from that.

    What do you mean by this? Isn’t it a good thing to help more people come to the rational decision of defaulting on their mortgages (when it makes sense)? The more people who turn in the keys, allowing over-all debt loads to be reduced (i.e. through write-offs), the better. Or so I would have thought…

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  57. 57
    Drone says:

    For those who are concerned with morals, maybe it would be best to start at home. I personally believe that my very first ethical/moral responsibility is to my family. THEN, to my neighbors, then country, etc. If I have to choose only one then I’m saving my family first.

    I think this is an important consideration for underwater houseowners. Pouring money into a hole for decades will have a real, measurable impact on your family/children. I think the argument can be made that in some cases, NOT defaulting is equivalent to NOT taking care of family. So walking away becomes the only truly moral/ethical choice.

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  58. 58
    buystocks says:

    RE: The Tim @ 1
    Here’s your flaw. I’d argue that almost all the same people that strategically default will also not pay their mortgage and live rent free… If you can’t separate the two, practically, then I assume this would change your position.

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  59. 59
    drshort says:

    By The Tim @ 49:

    By drshort @ 47:
    Follow the money after someone defaults. The banks aren’t the one’s that end up having “direct detrimental effects” — it’s the taxpayers, stockholders, pension plans, and neighbors.

    And that is the banks’ fault for not properly assessing (or often knowingly misrepresenting) the risk in the first place.

    You can make all the arguments you want about how evil and wrong the banks are. And you’d be right. But you’re missing the point.

    1) You willingly made an agreement with the bank and promised to fulfill your obligations under the contract. This means acting in good faith (which you seem to be ignoring).

    2) By walking away you are directly transferring your debts and obligations to society. Other people which no connection to you or the bank will be burdened with your debt.

    Either of those two items are ethical lapses.

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  60. 60
    Brainiak says:

    Are the bonuses and salaries of the CEO’s of Bank of America, Goldman Sach’s or any other major corporation ethical? I think not. None of them will ever say “I am paid too much, I am not really producing value to match that” which has been the case on countless occasions. Our economic system is flawed from top to bottom . To try to apply an ethical measure to an unethical system sounds insane to me.

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  61. 61
    drshort says:

    By Drone @ 57:

    Pouring money into a hole for decades will have a real, measurable impact on your family/children. I think the argument can be made that in some cases, NOT defaulting is equivalent to NOT taking care of family. So walking away becomes the only truly moral/ethical choice.

    Couldn’t the same be said for paying your taxes? Couldn’t you provide better for your family if you stopped paying them. Would that make it ethical or moral?

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  62. 62
    LeftOverpricedSeattle says:

    For me, I guess it comes down to this…

    While banks may be heartless, nameless, faceless corporations that will screw a person any chance they get, I, under no circumstances, want to become like them.

    If that makes me a sap, a fool or an easy mark, then so be it.

    I refuse to follow their moral and ethical compass. The minute I start using their methods, I lose far more than the money I might owe them.

    It’s easy for me though, because I don’t owe anyone anything. No car payments, no house payments, no loans, etc.

    ;)

    But I still think it comes down to the question of what stops you from doing something….

    Do you stop yourself from doing it because you think it is “wrong”, or because it is “against the law”?

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  63. 63
    The Tim says:

    By drshort @ 59:

    1) You willingly made an agreement with the bank and promised to fulfill your obligations under the contract. This means acting in good faith (which you seem to be ignoring).

    I would contend that most borrowers during the bubble were in fact signing the mortgage paperwork in good faith. They had no intention of defaulting. However, if their situation changes dramatically down the road, as it has for many people, are they somehow retroactively not “acting in good faith” when they signed the mortgage if they should choose default as their most viable financial course of action?

    Also, I question what portion of a mortgage contract specifically binds the borrower to this “good faith” standard for the duration of the loan term. I readily admit that I am not an expert in mortgage contract language, but the documentation I have looked through contains no such constructs.

    2) By walking away you are directly transferring your debts and obligations to society. Other people which no connection to the bank will be burdened with your debt.

    No, you are directly transferring your debts to the bank alone. Now, if the bank then transfers that to society at large, again, that is the bank’s fault. You could absolutely argue that a strategic defaulter is indirectly transferring their obligations to society due to the subsequent actions of the bank, but it is most certainly not direct.

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  64. 64
    per_se says:

    Like it or not both you and the bank are deciding on the loan the same way:

    expected cost versus expected utility

    Your utility and cost consisting of both quantifiable($2k a month for 30 years, pay $300 fine if caught, etc.) and personal(you think if you steal something you’ll go to hell, you think if you loan your friend money he’ll invite you to his BBQ, if I spend this much on rent I won’t be able to buy a new car, etc)

    The bank is doing their calculations on their end and you are on your end and everyone’s calculation will be a little different and may change over time.

    All people are saying is that you should re-evaluate that formula about your mortgage with some new information (the value of your home now, legal and financial consequences of defaulting)

    There is nothing magical about contracts. Defaults are part of the economic system, just like shorting a stock. Someone made a poor calculation on the risk or value of something and the system corrects itself. In the future maybe the bank will be more thorough in evaluating a borrower to reduce their risk or ask for a larger down payment.

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  65. 65
    Drone says:

    By drshort @ 61:

    By Drone @ 57:
    Pouring money into a hole for decades will have a real, measurable impact on your family/children. I think the argument can be made that in some cases, NOT defaulting is equivalent to NOT taking care of family. So walking away becomes the only truly moral/ethical choice.

    Couldn’t the same be said for paying your taxes? Couldn’t you provide better for your family if you stopped paying them. Would that make it ethical or moral?

    I pay my taxes, even when I disagree with them. However, if my taxes ever rose to the point that they actually threatened the well-being of my family, then yes I would consider not paying them too.

    FWIW I don’t really see that as likely to happen in my lifetime. But it is still the logically consistent position.

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  66. 66
    The Tim says:

    By LeftOverpricedSeattle @ 62:

    I refuse to follow their moral and ethical compass. The minute I start using their methods, I lose far more than the money I might owe them.

    If you don’t want to play their game, then don’t play their game at all. But if you play their game by getting a loan, then you apply a different, more strict set of rules to yourself than those that the bank will be playing by, you’re pointlessly setting yourself up to be screwed.

    It’s easy for me though, because I don’t owe anyone anything. No car payments, no house payments, no loans, etc.

    Ain’t debt-free living grand?

    Do you stop yourself from doing it because you think it is “wrong”, or because it is “against the law”?

    Both (but primarily the former). But I still see no compelling argument that opting for the default provision in a mortgage contract is “wrong.”

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  67. 67
    BacktoBasic says:

    If you seeing people doing the unethical things and spread the toxic mortgage to debt holder or tax payers, does it mean you can do the same thing?

    Tim’s structural default theory toxic to the society and everyone who trying to make their payment in ‘good failth’ . All for his personal agenda.

    Never undo a good thing because it is too tiny to do. Never do a evil thing because you can through a system.

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  68. 68
    The Tim says:

    RE: drshort @ 59 – Speaking of acting in good faith, this story just happened to pop up today (ht @jillayne): How Banks Silenced Whistleblowers

    In early 2006, Darcy Parmer began to worry about her job. She was a mortgage fraud investigator at Wells Fargo Bank. Her managers weren’t happy with her. It wasn’t that she wasn’t doing a good job of sniffing out questionable loans in the bank’s massive home-loan program. The problem, she said, was that she was doing too good a job.

    The bank’s executives and mortgage salesmen didn’t like it, Parmer later claimed in a lawsuit, when she tried to block loans that she suspected were underpinned by paperwork that exaggerated borrowers’ incomes and inflated their home values. One manager, she said, accused her of launching “witch hunts” against the bank’s loan officers.

    One of the skirmishes involved a borrower she later referred to in court papers as “Ms. A.” An IRS document showed Ms. A earned $5,030 a month. But Wells Fargo’s sales staff had won approval for Ms. A’s loan by claiming she made more than twice that—$11,830 a month. When Parmer questioned the deal, she said, a supervisor ordered her to close the investigation, complaining, “This is what you do every time.”

    Amid the frenzy of the nation’s mortgage boom, the back-of-the-hand treatment that Parmer describes wasn’t out of the ordinary. Parmer was one of a small band of in-house gumshoes at various financial institutions who uncovered evidence of corruption in the mortgage business—including made-up addresses, pyramid schemes, and organized criminal rings—and tried to warn their employers that this wave of fraud threatened consumers as well as the stability of the financial system. Instead of heeding their warnings, they say, company officials ignored them, harassed them, demoted them, or fired them.

    Go figure.

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  69. 69
    S. Marty Pantz says:

    In the cell phone example, I have not yet received the other 22 months of service when I “walk away.” I have paid for all the services I received, then chose to discontinue the service. In the mortgage example, however, some real estate seller wanted $X for his/her property and I agreed to buy the property for that amount. But I did not have the money to pay cash for it, so I borrowed the funds from the bank. The bank paid the seller for me and I agreed to repay the bank for the money it put out via a mortgage contract. Walking away from that obligation is vastly different, IMO.

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  70. 70
    Jillayne says:

    The Tim says, “All that being said though, I still have yet to see a compelling argument that ethics should even enter into the conversation when discussing whether or not to pursue strategic default.”

    Jillayne says the decision to not consider the ethics…..is in itself an ethical decision. I can see that The Tim has already thought about the ethics quite a bit.

    Ethics says “There is no universal standard for ethics”

    Jillayne says sure there is.

    virtue, duty, and consequences. For example:

    Virtue: What kind of person do I want to be in the world? (Aristotle)
    We see many different values and virtues across the world, manifested differently depending on the culture, of course, but there are definitely a set of universal values that all humans (with some minor exceptions) admire in others.

    Duty: What duties to I have to myself, my family, and to others? When these duties conflict, how can I rank my duties? (Kant) For example, we see that Ray and others put their family first.

    Consequences: What are all the possible consequences? (JS Mill)
    For example, The Tim has spent time considering all the consequences but sometimes it is not possible to know all the consequences at the time the decision is made.

    and yes, these theories live inside a culture whether that’s a corporate culture, family culture, and so forth.

    I just got off the phone from talking with a consumer who is considering walking away from her mortgage. People really struggle with this decision not because they are having a problem stiffing the bank, instead they are struggling with trying to determine all the possible consequences short term as well as long term.

    For example, how is it possible to know that at some point in the future, an employer will disqualify you for employment due to a foreclosure? What about a professional license that you might hold now or in the future? There are lots of unknowns and this fear creates a lot of anxiety in people. They want to make decisions that match their own values such as honoring a contract.

    It is not an easy, rational, black and white decision. Corporations exist solely to earn profit within the bounds of the law. Humans and corporations are different.

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  71. 71
    drshort says:

    One of the ethical tests I remember from way back in college was:

    What if everyone acted in the way described?

    I think it’s fair to say that if everyone who was underwater just defaulted, we would have an unprecedented economic collapse. The government would be unable to prop up the banking system and the dominoes would start falling. Banks, pension funds, 401ks, insurance companies, etc..

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  72. 72
    Sniglet says:

    if everyone who was underwater just defaulted, we would have an unprecedented economic collapse. The government would be unable to prop up the banking system and the dominoes would start falling. Banks, pension funds, 401ks, insurance companies, etc..

    Ummm… This is what’s happening anyway. The whole economy grinds to a halt when there are masses of under-water debt obligations. The only way to get things straightened out is to having a purging of under-water debt.

    The only real questions is whether this process of debt purging should occur over a long period of time (as has been the case in Japan for the last 20 years) or to have it over and done with quickly.

    I would even argue that having people walk-away will be a positive force in helping the economy get straightened around. If every bank in America needs to go bust in the process, then so be it. If the government has to declare that the FDIC can’t make good on making every depositor whole, then so be it.

    Once all the bad debt is written off, then we can once again get the economy on a sound footing. The alternative is to live through DECADES of economic doldrums.

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  73. 73
    patient says:

    To the people who rage that it’s unethical and immoral. Do you spend only on neccessities and send the rest to the starving people of the world? Are you vegetarians? If not, get off your high moral horses please. Is it morally defendable to kill animals for food when there are substitutes? Is it morally defendable to let people die of starvation that your luxuary spending could feed? I guess almost noone here lives morally and ethically correct. The only reason you rage about this particular subject of walk aways is because you are afraid you are going to be on the losing side not because it’s a major moral or ethical issue.

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  74. 74
    Sniglet says:

    The only reason you rage about this particular subject of walk aways is because you are afraid you are going to be on the losing side not because it’s a major moral or ethical issue.

    I certainly agree that most people who are deeply upset about the morality of “walking away” are very concerned about the broader economic fallout to themselves, and the world, from such actions.

    What I think that most of these people fail to understand is that the end-game of a collapse of the financial system as we know it is inevitable, the only question is whether we are going to try and drag the pain out for decades or let things come to a head quickly.

    90% of under-water home-owners will ultimately be forced into default anyway, even if they choose to hang on for the moment. I just don’t see how it does any good for either these borrowers, or the financial system, by delaying the inevitable.

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  75. 75
    patient says:

    RE: patient @ 73 – Or perhaps that was unfair, some of you have probably just bought into the “ethics” propaganda around defaults that I would guess is started and supported by the real estate and banking industry.

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  76. 76
    Ryan says:

    For those of you arguing that you are bound by some duty to act in good faith; does this not apply to the bank side of things? They have entered agreements with the federal gov’t (by accepting bailout money) that they will negotiate in good faith to assist homeowners in staying in their homes in addition to increasing their lending. Instead, they have received money via discount window at 0%, invested it or bot treasuries with it, and pocketed the difference. How else do you account for those awesome earnings? Not exactly dealing in good faith if you ask me.

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  77. 77

    I’ve got mixed feelings on this one.
    On the one hand, banks have acted immorally for years, they’re a bunch of lying slimebag thieves and I have absolutely no sympathy for them.
    On the other hand, I also like to see people acting in a responsible manner, and treating a mortgage frivolously doesn’t indicate taking responsibility. Maybe not immoral, but maybe irresponsible?
    On the third hand, if it’s a mattter of , say, needing to leave the area or needing to find something far less expensive……?
    If holding on to the property is possible, but will keep you barely treading water and you are convinced of the enormity of your mistake and don’t know how else to get out of a desperate situation…?
    There are a lot of people out there who are underwater. I’m not sure it would be a good thing to encourage all of them to stop paying their mortgage, but on the fourth hand , I’m the guy who would like to see bank CEOs behind bars.

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  78. 78
    johnnybigspenda says:

    Why should people be held to a ‘moral standard’ when banks are only held to a ‘legal standard’?

    Entering into the agreement, the borrower agrees to make payments with interest (and other fees). If he doesn’t make the agreed upon payments, the bank gets the collateral (ie the house). In theory, the interest and fees are supposed to cover several things: the banks’ costs to service the loan, some profit, and also some premium for risk of default. When the loan is made, the bank makes an assessment of how much risk is involved in the loan. They look at the value of the property, the borrower’s credit score, market conditions as well as the amount of cash the borrower is putting down. All of this is meant to ensure that the bank won’t lose money even in the event that the borrower defaults on their payment obligations.

    The bank was willing to loan the borrower the money under those conditions (and assumed the risk). If the banks made a bad assessment of risk (unanticipated market conditions or whatever) and the borrower walks away, it is nothing more than a bad business decision made by the bank. Most of the time they win, sometimes they lose.

    You don’t see banks lowering their interest rates for borrowers who are locked in to a 30 year fixed even when the Fed rate dropped to zero (paid for by you and I the tax payers). So if its a contract, its a contract. The banks have no ethical argument. They can’t have it both ways.

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  79. 79
    Ross Jordan says:

    By Kary L. Krismer @ 12:

    By D. in Ballard @ 9:
    I recently talked to a mortgage broker whose specialty is reverse mortgages. I’m paraphrasing very badly here, but he said that a lot of the banks are selling their mortgages to collection agencies. These agencies will wait until the person gets back on their feet after walking away from a mortgage and then ding them for the money. Is this true? Urban myth? Sounds awful..

    That’s what they’ve done for decades on credit card debt, so I don’t know why mortgage debt would be any different.

    This is also an issue with short sales where the seller didn’t get proper legal advice.

    I’m not sure about washington state, but some states have a ‘statute of limitations’ on old debt collection, which might make this strategy not work everywhere.

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  80. 80
    The Tim says:

    By Ira Sacharoff @ 77:

    …but on the fourth hand , I’m the guy freaky four-armed alien monster who would like to see bank CEOs behind bars.

    Fixed that for you. ;^)

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  81. 81
    Stb says:

    While I think it’s unethical to walk away if you have the means to make your monthly payment, I wouldn’t think anything less of someone sending in their keys if they lost their job and had a house under water 50%.

    Human nature drives us to make decisions that are in our best interest. Banks authorized risky loans to satisfy their shareholders, real estate agents sold houses they knew were overprice to put food on the table (In some cases to get the newest big screen TV and or sports car), and Joe Schmoe bought a house out of his price range to get a “great deal” (Or so he thought).

    Just like politics or religion, this is a great topic of discussion that will lead to zero conclusions. Some of you think it’s unfair to saddle the general public indirectly with defaulted loans while others are happy to stick it to the banks and move on. We’re all coming from a different POV and act according to what is beneficial to ourselves.

    All that said, great topic Tim :P

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  82. 82
    The Kid says:

    Okay, seriously, I can barely believe the insanity I’m seeing on this thread. Ladies and Gentlemen, this is a mortgage contract we are talking about. It is debt with collateral. It is not credit card debt, or even a car loan. The loan was not made based solely on your ability to repay. The bank looked at what they were buying, on your behalf, and valued it, looked at your capacity to pay it, and valued that, and decided that your ability to pay was likely and in the event you were unable to pay, the collateral was worth the remainder of the loan. That’s what they should have done anyway, but they did not. Their loss.

    This is not a personal bond, an obligation to pay, in perpetuity, forever and ever amen.

    You did make a promise: you promised to give them the money, or give them the house. Not “If you don’t pay we will take your house” not “If you’re a bad boy we will punish you for not fulfilling your obligation to pay, pay, pay”.

    Give them the money, or give them the house. Presumably to sell and recoup their losses.

    That was the promise.

    Period.

    If the house still had any value left in it, no one would consider the decision to walk away unethical or immoral, we wouldn’t even be having this conversation.

    Nothing immoral or unethical about the agreement, or one’s decision to fulfill it in a way that was previously agreed upon to be mutually acceptable by both parties. The banks have merely decided that they do not want the houses anymore because they are worthless, and are now trying to make us feel bad for giving them back, fulfilling the contract in a way that is now less desirable for them. Boo hoo.

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  83. 83
    Ross Jordan says:

    By BacktoBasic @ 18:

    […] Trust me, your employer do credit check before hiring you.

    I’d never work at a company who tried to pull my credit or any other form of invasive checks (i.e. mandatory urine tests). And not because I’d fail the tests, but I consider the request overreaching and invasive. Those kinds of requirements might be able to screen out some of the really undesirable applicants — but you’ll also screen out many of the principaled honest applicants at the same time leaving you with the mediocre middle.

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  84. 84
    drshort says:

    RE: patient @ 75

    I don’t think keeping your word and not expecting everyone else to pay for your bad investment is propaganda.

    It’s surprising that a site which blames homeowners for buying more than they can afford, using their house as an investment, etc. is so willing to let them off the hook.

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  85. 85
    The Tim says:

    By Stb @ 81:

    All that said, great topic Tim :P

    Hey, it’s been a while since we’ve had a contender for a position on the top 100 most-commented posts. Just trying to keep things lively :^)

    By drshort @ 84:

    It’s surprising that a site which blames homeowners for buying more than they can afford, using their house as an investment, etc. is so willing to let them off the hook.

    Who says I’m letting them off the hook? There are still a ton of consequences for those that choose to strategically default. I’m just saying I don’t think there is a compelling argument that making that choice is unethical.

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  86. 86
    Ross Jordan says:

    By drshort @ 16:

    2. The comparison to the termination fee on a cell phone contract is absurd. Early termination of a cell phone isn’t breaking the contract. The early termination is spelled out as a legitimate option under the contract terns with a fee that covers the cell phone companies prepaid costs. Walking away from a mortgage is breaking the implied good faith and promises to pay.

    To play devil’s advocate, the option to walk away (possibly with penalties, in a judicial foreclosure) is a longstanding *implicit* option on the mortgage contract that both the borrower and lender should understand, given that there is state and federal laws (as well as case law) to special case a mortgage compared to just about any other form of debt.

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  87. 87
    patient says:

    By drshort @ 84:

    RE: patient @ 75

    I don’t think keeping your word and not expecting everyone else to pay for your bad investment is propaganda.

    It’s surprising that a site which blames homeowners for buying more than they can afford, using their house as an investment, etc. is so willing to let them off the hook.

    Not “everyone” else but the party of the contract that assumed the risk. The everyone else, tax payer etc nonsense is just showing how corrupting the bailouts have been. It’s the lender who assumes the potential loss at default. Any tax payer cost you have to take up with the government. You don’t like it, vote them out. That’s how democracy works. And your word is your signature on the contract that states the rules, including the rules around defaulting.

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  88. 88
    per_se says:

    A lot of people seem to hinge their argument of the morality and immorality of this on whether you can afford to pay or not. What about the reverse of it? If the bank can afford to lose money on a mortgage should they let someone who can’t pay live there. Is it immoral if they hold them to the contractual agreement?

    I you sign a rental agreement for a year and have to move to a new job in the middle should you be morally obligated to pay the rest of the rent payments or just the one month penalty in the rental agreement? You did agree to pay the rent in good faith.

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  89. 89
    quadro says:

    By drshort @ 59:

    You can make all the arguments you want about how evil and wrong the banks are. And you’d be right. But you’re missing the point.

    1) You willingly made an agreement with the bank and promised to fulfill your obligations under the contract. This means acting in good faith (which you seem to be ignoring).

    2) By walking away you are directly transferring your debts and obligations to society. Other people which no connection to you or the bank will be burdened with your debt.

    Either of those two items are ethical lapses.

    Wrong. You have fulfilled your obligation by turning in the keys to the house. End of story.

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  90. 90

    RE: The Tim @ 1

    I Paid My Mortgage Principle Off Last Year

    Would I default if I had an upside down loan and not enough money to keep payments up and eat? Hades yes.

    Should the American taxpayer help me with my mortgage payments, if I was in this situation? Hades no.

    Did the banks give out too many brainless loans the last decade or two? Hades yes.

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  91. 91
    Ross Jordan says:

    By drshort @ 71:

    One of the ethical tests I remember from way back in college was:

    What if everyone acted in the way described?

    I think it’s fair to say that if everyone who was underwater just defaulted, we would have an unprecedented economic collapse. The government would be unable to prop up the banking system and the dominoes would start falling. Banks, pension funds, 401ks, insurance companies, etc..

    What if everyone became a doctor? Then we’d have too many doctors, and there would be no one to build roads, homes, grow food, or (even) provide financing — which would lead to unprecedented social and economic collapse. So, by that rule, I guess being a doctor is unethical?

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  92. 92
    patient says:

    And btw the borrower have no obligations, contractual, moral or ethical to any entity beyond the lender. Not to the securitization or the investors who buys the leveraged garbage. Each step in the chain has a seller and a buyer with their own obligations.

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  93. 93
    David Losh says:

    The term under water is an interesting way to phrase an asset that was used as collateral for a loan. The bank lent on an asset.

    They took that loan and sold it for a profit. A lot of people made huge profits from making over priced loans on assets that were worth less than the value of the Promise to Pay, the Note. The Security of the Notes are worth less, so now the banks don’t want to owe the difference. They came to the world governments instead.

    Banks made a decision to lend more than properties were worth for years because they could sell those properties for a profit in case of default.

    You need to understand, your government is paying for a threat from the banks that they will stop doing business. Banks have threatened not to make loans. Banks have made all the money they want, and now they are picking up, and moving on.

    If you continue to pay, any bank, or credit union, any money, it is all profit to them.

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  94. 94

    By Sniglet @ 56:

    I can’t imagine what would compel you to put a strategic default page on your website. No good can come from that.

    What do you mean by this? Isn’t it a good thing to help more people come to the rational decision of defaulting on their mortgages (when it makes sense)? The more people who turn in the keys, allowing over-all debt loads to be reduced (i.e. through write-offs), the better. Or so I would have thought…

    What I meant by that is it won’t generate any business for him, and it is a potential liability issue for him. But in any case, watching three news stories, none of which are apparently local, isn’t likely to help anyone make a rational decision. So it’s not helping anyone either.

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  95. 95

    By The Tim @ 85:

    Who says I’m letting them off the hook? There are still a ton of consequences for those that choose to strategically default. I’m just saying I don’t think there is a compelling argument that making that choice is unethical.

    Notes typically say “I promise to pay . . ..” How is it possibly ethical to intentionally break a promise that you have the ability to perform?

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  96. 96
    The Tim says:

    RE: Kary L. Krismer @ 95 – Because there are specific remedies that the bank agreed to with you ahead of time should this “promise” not be kept. You both signed papers that said, in effect, “I will pay the mortgage and I understand that if I don’t the bank will take the house.”

    It’s not much of a promise when there is a specific remedy laid out that explicitly expects the “promise” to be broken. If someone makes me a promise, I expect it to be kept and do not pre-define the terms of what happens when they fail to keep it.

    I’m definitely no fan of how the legal system has twisted and convoluted our language, but there are many words that mean one thing to most people in casual conversation and yet mean another thing entirely when written in a legal document. I contend that “promise” is one such word.

    In the way that the word is used by most people in casual conversation, yes, it is usually unethical to break a promise. However, when it comes to legal matters with well-defined specific terminology, that’s another issue entirely.

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  97. 97

    By The Tim @ 96:

    RE: Kary L. Krismer @ 95 – Because there are specific remedies that the bank agreed to with you ahead of time should this “promise” not be kept. .

    I wouldn’t phrase it that way at all. Since it’s a legal obligation there are remedies that the law provides. It has nothing to do with what are agreed remedies, unless the remedies are somehow restricted from whatever the law otherwise allows. As further proof it’s not an agreement, the remedies of deed of trust holders were restricted last year when they had to jump through more hurdles to be able to foreclose. Those extra hurdles were not part of any agreement.

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  98. 98
    3rd Generation says:

    Ethics and Morals should never be used in the same sentence with Big Banks or Mortgage BROKErs. They are diametrically opposed concepts, like Good and Evil in my opinion.

    If in that position, I would: Walk AWAY after all strategic default plays are exhausted. String them on as long as you can. THEN Tell them you want $10K cash hand-delivered before morning or there won’t be anything left for them to work with and the plumbing and walls will be found in the pool. If you have any trouble sleeping try repeating these names, et. al.:
    Blankfein, Goldman Sachs Gang, St St Stut Stutterer Paulson, Bernanke-Geithner-Greedscam, Merril Lynch Mob, Summers, Rubin, Bank of America Bandits, Lewis, Mozillo, Countrywide KBR Halliburton, Cheney, Houses only go up, Buy now or be priced out forever, only losers rent…

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  99. 99
    patient says:

    I’m just waiting for someone to dig up some bible quote that condemns strategic defaults since that’s historically the methods of the out numbered elite to control the people. If the law doesn’t help, try the morality angel and if that doesn’t work resort to the inevitable judgement day when your strategic default will barr you from heaven.

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  100. 100
    per_se says:

    RE: Kary L. Krismer @ 97 – Kary, aren’t those hurdles just part of the risk the bank took up when it chose to have foreclosure be the remedy for lack of payment?

    Businesses make the same decisions to default, break rules or agreements and deal with the consequences. It’s not personal, it’s just business.

    The banks are entering into the agreement and setting the terms. They are fully empowered to reduce their risk if they want to.

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  101. 101
    HappyRenter says:

    What about the huge oil spill in the Gulf of Mexico? Is that ethically and morally acceptable? Just drill a few miles into the ocean and generate a catastrophe.

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  102. 102
    David Losh says:

    RE: Kary L. Krismer @ 97

    The promise to pay is always an interesting argument. Let’s say you promise to pay child support. One day you find out your ex spouse is beating the child. You go to court, you go to Congress, and you follow every avenue available to you, but the beatings continue. Then they get worse.

    Do you continue to pay for this behavior?

    You find that your ex spouse is buying drugs with the money, is unable to work, and your child is eating out of a garbage can. Do you continue to pay?

    Too emotional, because that’s exactly what is happening by giving banks money.

    Let’s say you buy a car, you promise to pay, then find out the price is twice what the car is worth. The seller knew the car was in an accident, fixed it, then sold it to you. Do you continue to pay?

    There are millions of examples where you pay based on a promise you made, to crooks, swindlers, drug addicts, and thieves. Do you morally support bad behavior, that hurts other people, once you realize the promise you made was based on lies that were told to you?

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  103. 103
    EconE says:

    Being that The Tim doesn’t “appreciate” my bluntness, I’ll just say…

    It depends.

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  104. 104
    ray pepper says:

    So many people I want to make comments to but I will sum it up.

    Kary: We placed that on the website because it remains our most common call when people are thinking of listing with us and paying 100 or 500.00 via Pay Pal. Its a complete waste of time and their money when they are upside down. We advise everyone to contact their lender and try for Loan Mod. If they must sell in the short term we advise the seller to look into short sale and to contact their tax advisor/attorney. If those efforts failed or are not suitable we educate everyone about Strategic Default. We profit in no way from sellers performing strategic default or short sales for we do NOT represent sellers in short sales.

    I read so many posts I like but this statement stands out and it is so very true:

    90% of under-water home-owners will ultimately be forced into default anyway, even if they choose to hang on for the moment. I just don’t see how it does any good for either these borrowers, or the financial system, by delaying the inevitable…

    I forgot who posted this….But, it remains so very true.

    With the cost to sell @ 10% and soon 1/2 the home owners with Mortgages to be upside down the quicker you can “release the shackles” of this lead weight from your neck the sooner you can move on with your life. Appears most of the clients I talk to are about 30-40% upside down. In the next 5-7 years they will still be upside down 10-40%. The people do NOT have the money now to cover and its highly likely they will NOT have it in 5 years being shackled to that payment. We continue to delay the inevitable and prolong the misery for the homeowner. If they plan on living in the home 30 years then try for a Loan Mod if needed. But, if you are planning to move in this decade good financial planning should focus on your current situation in your home.

    I kind of like this video. Listen to the panel. Then listen to Max Ferris from Bulls and Bears on the caller from Vegas. Listen how he tells the truth…Look what happens to him when he does… He is dead on, while the guy from Zillow attempts to tell the truth but holds back, while all the other buffoons just suck up oxygen:

    http://www.youtube.com/watch?v=jZOg1YPZSjk&feature=related

    Larry Winget: My Vote for biggest idiot caught on tape! golly I wish I could have been on that panel.

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  105. 105
    buystocks says:

    The real question that should be answered is if it is morally/ethically acceptable to live in your foreclosed home rent/mortgage free? If we assume that the vast majority of people “walking away” are living rent/mortgage free, then can’t it pretty much be assumed that people “walking away” have poor character.

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  106. 106

    RE: buystocks @ 105 – That’s typically part of the homestead rights, and in any case, assuming an inability to pay the bank probably won’t accept partial payments and probably prefers that the owner live there until the foreclosure. Empty houses are not a good thing for banks.

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  107. 107
    Anon. says:

    I totally agree, Tim!
    Especially the last statement.

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  108. 108
    wreckingbull says:

    How come intent has not been discussed more?

    1. Buyer A has medical problems which lead to a cash flow problem. Walks away.
    2. Buyer B buys as many homes as possible, using legal, zero-down, no-doc loans. Never has any intent to service the debt on them. Legally pulls out HELOCs to live like a sailor on shore-leave. Walks away.

    Aren’t the ethical implications of these two scenarios quite different?

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  109. 109
    James Lupori says:

    Tim – Thanks for the thoughtful post and thanks for mentioning my post on KenmoreUndressed.com. My little poll (similar to yours) seems to indicate a 50/50 split on whether it’s morally/ethically wrong to walk away from a mortgage. I’m not surprised as I’ve been in the credit industry for many years and most people have a deeply-ingrained sense of right and wrong about paying their debts. Many people I currently council about their financial problems would rather die than file for bankruptcy or walk from their obligations…….

    Having said that, I think it is irrational to believe that a mortgage is nothing more than a contract. It isn’t a sacred 10-commandments-type-manifesto from the gods. We enter into contracts in order to protect our interests and to guarantee performance. If one of the parties breaks the contract, there are consequences. In the case of strategic default, the borrower will, in all likelihood suffer consequences. Some worse than others; however, it is incumbent for anyone going down this path to consult with an attorney and accountant and become familiar with “the nasty bits.”

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  110. 110
    The Tim says:

    RE: wreckingbull @ 108 – Absolutely. However, the situation I’m mainly addressing isn’t either of those. I’m talking about a case where the buyer did originally intend to pay (based on their belief in the lie that home values always go up, fear that they would be priced out forever if they didn’t buy right away, etc.), but today the economics no longer make any sense for them to continue paying, so they are choosing to walk away even though they could technically afford to keep paying.

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  111. 111
    Anon. says:

    RE: The Tim @ 39

    Reading the rest of your posts, Tim.
    Why can’t people just see things logically like you are explaining them here? I’m sitting here, getting all worked up at peoples’ lack of analytical abilities!

    I also hear people comparing this to borrowing money from friends without the intent to pay back. That is such a flawed analogy. A perfect analogy would be borrowing money from friends, outlying the agreed upon terms of repayment, and also outlying exactly the consequences if the friend does not repay. Typically, the friend would require some collateral which will be kept if the borrower does not repay. Then if the borrower does not repay, the friend keeps the collateral and everyone is happy. Noone agrees to a contract unless they can say that they will be satisfied in all outcomes, or at least are willing to make a calculated risk such that their expected value of satisfaction is non-negative!!!! In this case, you see that this person is not a friend, because friends don’t require collateral. Therefore proving the point that you cannot even try to make an analogy with “friends” because friends make agreements where there are outcomes where one member may be unsatisfied. This is the thing you refer to as “trust” which doesn’t even exist in terms of businesses/corporations. Instead, corporations have “scores.”

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  112. 112
    Sniglet says:

    I fail to see the difference between getting a mortgage and pawning your power drill. In either case the lender gets to posess the asset pledged as collateral if the loan isn’t repaid. No one feels as if the borrower who pawned their wedding ring is somehow skirting with immorality when they don’t pay back the loan. Why then should there be a double standard with mortgages?

    Hey, it’s not the borrower’s fault if the pawn shop made a huge mistake in their appraisal of the value of the ring that was pawned. Likewise, it’s not the home-owner’s fault if their home doesn’t have the actual value the bank thought it did.

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  113. 113
    JJG says:

    I think the cell phone or other contract analogies fall a bit short. Over decades our country has established, through both GSE’s and tax policies, a preference for home ownership and an effective subsidization of the cost. Society as a whole and each individual contributes to this subsidy (some more than others). I think as a society we hold mortgage contracts to a higher ethical standard. Not to say individuals don’t often violate those standards (Riverwalk).

    Banks have benefited as the facilitators of the gov’t policy, with access to cheap cash. The bubble only changed one side of the equation and banks took full advantage. I have no problem with people walking away as a business decision. This would help us get closer to some sort of equilibrium. The problem is the gov’t and accounting prop up of certain banks that would be otherwise insolvent. Then being too bought-and-paid-for to enact any legislation that will make a difference.

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  114. 114
    wreckingbull says:

    RE: The Tim @ 110 – Fair enough, but do keep in mind that there is no clear-cut line as you go from my edge case to your middle-of-the-road example. This is exactly why moral philosophy gets such a big response – everyone has their own subjective views about it.

    All I have to say is this: I THOUGHT SUZANNE RESEARCHED THIS!!!! WHERE THE $%^# IS SUZANNE????? SUZANNE!!!!

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  115. 115
    DrShort says:

    By Anon. @ 111:

    RE: The Tim @ 39
    Reading the rest of your posts, Tim.
    Why can’t people just see things logically like you are explaining them here? I’m sitting here, getting all worked up at peoples’ lack of analytical abilities!

    My analytical abilities are fine. You and others don’t seem to accept the basic premise that a mortgage is a promise to pay. It’s not an option contract. It does not say “borrower will pay when its in his interest and will turn over the keys when it’s not.” That was not the “meeting of the minds” when the contract was agreed to.

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  116. 116
    Anon. says:

    RE: DrShort @ 115
    There is no such thing as a promise, as you are attempting to use the term, within the context of a legal agreement. Promises are things you make to your friends, and spouses. A legal contract is totally different. Your analytical abilities are a little weak here, my friend.
    When you don’t live up to a promise, typically there is no agreed upon penalty. Therefore the only thing that you loose when you break a promise is a nontangible moral cost.
    When people make a legal agreement, so long as people act as the agreement mandates in all circumstances (including default) there should never be anyone that says, “that dirty rat, they acted a particular way that was consistent with what we agreed upon!” You can’t say that, because BOTH parties agreed upon how both parties are required to act!

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  117. 117
    David Losh says:

    RE: DrShort @ 115

    Normally I would agree, but not today. I think the difference is, as with Ray, is that when you sit with people who had the best of intentions, then you look at the Note, you know something was terribly wrong.

    In my case it was the Hispanic community. People from all walks of life, with the very worst loans you can imagine. Attorneys, doctors, engineers, a priest, who ask me about these carpy loan packages. They don’t have the ability to refinance out of them. The only thing keeping them in the game, to this point, is the low interest rates. Once rates go up, they will be a walkin’.

    Another case is the number of people who were doing great business, and as Kary likes to point out, they borrowed to build that business. Today that promise, along with all the promises of a better tomorrow, are gone.

    We all got shafted by a banking industry that found more, and more emerging market to plunder.

    I’m going to call your attention to last Sunday’s paper. The article about Jose Guzman in Peru. Nice kid, great idea, profitable, but not as profitable as first thought. It was the exuberance of the global market place. He’ll be ruined, people will lose money, and the bank will end up with all the assets.

    It should be criminal, but it’s legal.

    Where’s the morality in what has been done to our global economy by banks looking for quick and easy profits?

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  118. 118
    Scotsman says:

    Wow, I’ve missed a good one! I voted that ethics should come into play in making the decision mostly because I want people to consider all of the long and short term ramifications of their decisions. But that being said, I don’t have a problem with people walking away from their mortgages if they understand and are willing to accept the responsibility and consequences for their actions. I’m not a fan of people walking away and blaming the loss on others- banks, greedy loan officers, etc. You signed the papers, you’re responsible. But that being said I see it mostly as a business decision, a hard look at the costs/benefits of walking or staying. Finally, I see it as totally ridiculous to try and hold individuals to a higher standard than we do the corporate players. If the banks and developers can and often do walk from bad deals in an effort to cut their losses, why not individuals? Legally there is no difference. So there shouldn’t be any additional shame or consequence laid upon an individual over a corporate entity.

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  119. 119
    EconE says:

    Homedebtor: “Makes no sense to pay…I’m walking even though I can afford it!”

    Bank: “You know, I have ways of fu#king you”

    Homedebtor: “Do what you’re gonna do”

    Bank: “I like @nal”

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  120. 120
    Anon. says:

    RE: DrShort @ 115
    You said:
    It does not say “borrower will pay when its in his interest and will turn over the keys when it’s not.”

    You are correct it does not say that, instead it says:
    “If the borrow does make payments, he will eventually get to keep the house. If the borrower does not make payments, then we (the bank) may keep the house.”

    Which makes it abundantly clear, what happens in either case, and both parties sign to that. If either doesn’t agree, then they shouldn’t sign.

    Here is what it ultimately comes down to:
    I make payments.
    The bank gives me the house.
    That is the agreement.

    If I don’t do my part the bank doesn’t do theirs.
    If the bank doesn’t do theirs, then I don’t do mine.

    The only tricky part is that one persons actions is primarily contingent on the others. My behavior happens first, then theirs. So if I don’t do my part, they don’t have to do theirs, but if I do do my part, and they still don’t do theirs, then it is illegal and unethical.

    So if I make a LEGAL agreement with you that if you drop off a pizza to my house, I will pay you money, and if you don’t drop it off, I don’t pay you money..
    Then if you drop the pizza off and I don’t follow through it is illegal and unethical, but if you don’t drop off the pizza and I don’t give you money, it is not illegal and not unethical.
    This is because of the causal nature of the agreement. This is the same as a mortgage.

    NOTE: i am not a laywer, do not take my advice, it is probably wrong anyways.

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  121. 121
    mark says:

    RE: The Tim @ 19

    Come on The Tim, That looks like something I might jump on. I thought that you were bigger than that.HaHaHa!

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  122. 122
    One Eyed Man says:

    RE: The Tim @ 63RE: The Tim @ 30

    I respect The Tim and his opinions, but IMO there are certain logical inconsistencies in his reasoning. Ironically, that doesn’t mean that I think his opinion is necessarily wrong. Tim said in comment 30:

    “It’s not a “promise”

    As Kary pointed out, the relevant text to refute the above statement will probably be in the opening sentence of any “Promissory Note.”.

    Tim said in comment 63:

    “Also, I question what portion of a mortgage contract specifically binds the borrower to this “good faith” standard for the duration of the loan term. I readily admit that I am not an expert in mortgage contract language, but the documentation I have looked through contains no such constructs.”

    The general rule pursuant to case law in most western states is that all contracts contain an implied covenant of good faith and fair dealing. My recollection is there are some exceptions to the above, but I don’t recall specifically if it applies to real estate loans. I’m embarassed I can’t remember because I used to represent both borrowers and lenders in sophisticated commercial loans secured by real estate.

    I also don’t really see the difference that The Tim believes is so important between moving out after you strategically default and remaining in the house. The Tim stated that he justifies defaulting and walking away because there are prescribed remedies which the parties have agreed to in the loan documents and under the law. But the same is true of the borrowers right to remain in possession of the premises until completion of the foreclosure and certain procedural steps thereafter.

    I largely agree with drshort as to my personal ethics. I generally believe that a mortgage is a promise to pay and that it is unethical to break ones promise if one feels they deserve to be considered “trustworthy.” But I also believe like Wreckingbull that ethics are subjective. In essence, I believe that one of our inalienable rights is the right to define for ourselves what we believe to be ethical. To me, its as basic as my right to my religion under the 1st amendment. That’s probably because my own moral compass is pretty much the only religion I have left. But that’s another story. In any event, much like religion, ethics are IMO incapable of proof and you don’t have to accept my definition of ethical behavior any more than I have to accept yours.

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  123. 123
    mark says:

    RE: drshort @ 22

    1. Dump my trash in the woods instead of paying $40 a month for garbage service.

    And now we have a garbage bubble! I’m paying less than $13.00 per month!

    I smell a new Job Opportunity for The Tim.

    Seattle Garbage Bubble!

    HeHeHe!

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  124. 124
    DanInEdmonds says:

    Fascinating discussion. I would not have any moral misgivings about exercising an option made available to me in a legal contract with a corporation.

    On the other hand, Dick Syron, former chairman and CEO of Freddie Mac, recently referred to people who strategically default on their upside-down mortgages as “ruthless.”
    This is what my mom used to describe as “the pot calling the kettle black.”

    http://www.huffingtonpost.com/2010/05/11/jpmorgan-chase-warns-inve_n_571103.html

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  125. 125
    mark says:

    RE: drshort @ 59

    You can make all the arguments you want about how evil and wrong the banks are. And you’d be right. But you’re missing the point.

    1) You willingly made an agreement with the bank and promised to fulfill your obligations under the contract. This means acting in good faith (which you seem to be ignoring).

    The bank is the one that wrote the contract!

    I’ve bought a couple of houses in my time, and every time that I went to sign, it was a contract that the lender wrote up, not me!

    If someone walks away, it is only under the terms that the bank wrote up!

    What is wrong with that?

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  126. 126
    Jonness says:

    The U.S. government handed huge amounts of taxpayer money to rescue U.S. banks so they don’t have to take a loss on their bad decisions to finance mortgages. U.S. tax dollars are even being used to rescue European banks from their poor decision-making. Private debt has been transferred to public debt, and massive borrowing and spending abounds in D.C. This occurs without a second thought as to whether sticking our children and grandchildren with the bill is unethical.

    And the taxpayers are supposed to feel bad about walking away on a poor financial decision that ultimately ends up dinging the bank’s record profits? Business is business. My advice is to not get caught throwing good money after bad. Do whatever is best for you, and let the banks take responsibility for signing a contract with you that turned out to not be in their best interest. If the roles were reversed, they would stick it to you with everything they had and feel good about doing it. If you let the banks play your emotions and prey upon the good in you, you are being conned.

    Look at the business contract you signed with the bank, and do whatever is in your best interest according to the terms of contract. Do not let emotions influence your decision. Make a purely logical decision about the well-being of you and your family. Then learn from your past mistakes and move on and make better decisions in the future.

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  127. 127
    corncob says:

    By drshort @ 71:

    One of the ethical tests I remember from way back in college was:

    What if everyone acted in the way described?

    I think it’s fair to say that if everyone who was underwater just defaulted, we would have an unprecedented economic collapse. The government would be unable to prop up the banking system and the dominoes would start falling. Banks, pension funds, 401ks, insurance companies, etc..

    You can use that argument for basically anything at all. What if everyone sold their stocks at once? What if everyone moved their money to local banks at once? What if everyone decided to stop eating chicken at once? What if everyone flushed their toilets at once?

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  128. 128
    Jonness says:

    By patient @ 24:

    I find these poor attempts to make the strategic defaulters some kind of etchical and moral criminals and cast the blame on them tacky.

    Exactly. Dumping trash in the woods and stealing from your neighbor is illegal. Walking away from a mortgage is none other than exercising your rights under the terms of a business contract between two parties. If it were in the banks best interest to stick it to the other party, they would do so without a second thought. Why should ethics and morality only be considered on one side of the contract?

    The banks bet on the model of house prices never going down. This allowed them to lower their lending standards to the level of sewer sludge in an attempt to make the biggest profits. High potential for returns are often accompanied by higher levels of risk. As it turns out, the banks made bad bets, and now they must pay the consequences according to the terms of the contracts they signed. It’s not like they would return the record profits if the bet went the other way.

    Alas, we don’t need to feel sorry for them. Most of their debts were tranferred to the public.

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  129. 129

    By JJG @ 113:

    I think the cell phone or other contract analogies fall a bit short. .

    I do too, for some of the reasons already mentioned, and because technically that is an agreement (see my prior post), and because if anything the cell phone contract situation is more like a pre-payment penalty on a mortgage.

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  130. 130

    By Anon. @ 116:

    RE: DrShort @ 115
    There is no such thing as a promise, as you are attempting to use the term, within the context of a legal agreement. Promises are things you make to your friends, and spouses. A legal contract is totally different. Your analytical abilities are a little weak here, my friend.
    When you don’t live up to a promise, typically there is no agreed upon penalty.

    A promise can be a contract if there is consideration. Thus if I promise to pick you up at the airport, you cannot sue me unless you gave me some consideration for that promise.

    In the mortgage situation there is clearly consideration for the promise to pay. The only thing different about the deed of trust situation is that there are homestead rights that give the debtor significant rights (e.g. the right to live in the house for one year after the foreclosure sale), and special remedies of the creditor that limit some of those rights (e.g. the right to live in the house is shortened to days after the foreclosure if the creditor forecloses non-judicially, but the creditor also waives the deficiency in doing so).

    As to agreed upon penalties, that’s not at all what we’re talking about here. Agreed upon penalties are called liquidated damages. What we’re talking about here are merely remedies. The breach of different contractual promises has different remedies depending on the promise.

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  131. 131
    joe dirt says:

    In a con, you give money and get nothing in return. Yet banks are accused of preying on home buyers by giving them hundreds of thousands of dollars and the keys to a new home to live in. Now when they have to make the payments, they say they have been conned?

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  132. 132

    By mark @ 125:

    <If someone walks away, it is only under the terms that the bank wrote up!

    What is wrong with that?

    Again, those aren’t the terms the bank wrote up. The remedies of creditors are virtually identical on every deed of trust. Non-judicially foreclose, judicially foreclose or sue on the note. The differences in the deeds of trust are what would constitute a default, but it would be a pretty poorly written deed of trust that didn’t include non-payment as a breach.

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  133. 133

    A lot of this discussion is going on because people are viewing it in black and white terms. Really ethics is a spectrum. You have things that are totally ethical (e.g. honoring all of your legal promises that don’t hurt others), things that are slightly unethical (e.g. always paying your mortgage 9 days late because you know there’s no late fee until the 10th day), and things that are very unethical (e.g. burning your house down to get the insurance). Beyond that you have things that are completely amoral.

    I don’t think anyone here would argue it’s totally ethical to not pay your mortgage if you can, and instead the disagreement is more over how unethical it is.

    Oh, one other thing. I don’t think the bank being on the other side should affect the answer at all. Your own ethics shouldn’t vary depending on who you’re dealing with, absent extreme situations like war.

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  134. 134

    By The Tim @ 80:

    By Ira Sacharoff @ 77:
    …but on the fourth hand , I’m the guy freaky four-armed alien monster who would like to see bank CEOs behind bars.

    Fixed that for you. ;^)

    I’ve only got two arms, but I can always lend a hand. I’ve got extra.

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  135. 135
    Jonness says:

    By Kary L. Krismer @ 132:

    By mark @ 125:
    <If someone walks away, it is only under the terms that the bank wrote up!

    What is wrong with that?

    Again, those aren’t the terms the bank wrote up. The remedies of creditors are virtually identical on every deed of trust. Non-judicially foreclose, judicially foreclose or sue on the note. The differences in the deeds of trust are what would constitute a default, but it would be a pretty poorly written deed of trust that didn’t include non-payment as a breach.

    The banks had full knowledge of the remedies prior to writing the contracts agreeing to the lend money to the other parties. They also had ample opportunity to fully check the ability of the borrowers to repay the loans. In almost all cases, they had far more knowledge of the risks involved than the parties to whom they lent the money.

    The banks purposefully increased their risk exposure in an attempt to make bigger profits. This has turned out to be an extremely poor business decision on their part. Unfortunately, instead of suffering the consequences of the contracts they signed, they have managed to buy enough politicians to transfer the losses to the other party via publicly held debt. That’s where the main ethics violation has occurred.

    Strategic default is good business practice and is akin to preying on the predator. It’s much like the mouse killing and eating the cat. Because the master has installed mouse traps paid for by the mice, the mice won’t prevail in killing all the cats. However, every dead cat represents a minor moral victory on behalf of the mouse population.

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  136. 136
    query_squidier says:

    By patient @ 73:

    Are you vegetarians?

    I’m a vegetarian.

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  137. 137
    Herman says:

    I came in without a strong opinion either way, and I’ve read most of your posts. Now my opinion is that it is ethically wrong.

    I think the strongest argument was that the spirit of the contract was not meant to be an option contract. Both parties were supposed to act in good faith. The borrower was supposed to pay it back in good faith, and the bank was supposed to provide the borrower with an opportunity to pay it back, also in good faith.

    They were not intended to be, nor priced to be, used as option contracts that the borrower could invoke whenever he chose to limit his downside risk. (While conversely, keeping all the upside gains if the asset price went up)

    Nor were they intended to be instruments by which the lender could set the borrower up for financial ruin so that the bank would have an excuse to take the house. Some might argue that a few of these no-doc interest-only loans were. That is widely acknowledged as an ethical issue for those LENDERS. There is plenty of anger and little debate over that. But two wrongs don’t make a right!

    Strategic defaulters are really good at rationalizing, though. Most will convince themselves that the bank kinda screwed them, didn’t answer the phone fast enough when they called about a loan-mod, and now they are free to do as they please.

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  138. 138
    ray pepper says:

    “As it turns out, the banks made bad bets, and now they must pay the consequences according to the terms of the contracts they signed. It’s not like they would return the record profits if the bet went the other way.”

    Outstanding statement and hits the nail on the head!

    “Strategic defaulters are really good at rationalizing, though. Most will convince themselves that the bank kinda screwed them, didn’t answer the phone fast enough when they called about a loan-mod, and now they are free to do as they please.”

    Strategic defaulters ARE EXCELLENT at rationalizing their decision. All the people who have engaged in this behavior that I have spoken with would of been a FOOL to continue to pay. I support every homeowner in their decision to stay, walk, or run……………

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  139. 139
    Jonness says:

    By Kary L. Krismer @ 133:

    I don’t think anyone here would argue it’s totally ethical to not pay your mortgage if you can, and instead the disagreement is more over how unethical it is.

    I emphatically disagree with that statement. The ethical obligation one feels to pay their mortgage if it is not in their best interest is nothing other than social brainwashing. Financial decisions are best made free of emotions brought about by years of brainwashing. When thinking financially, pure logic leads to the best decisions. Emotions should be reserved for more pure forms, such as creating original art or interacting with a loved one.

    The key is to achieve a balance between the emotional self and the logical self. However, mindlessly giving into emotions brainwashed into you from birth via the social structure around you is a form of mental weakness and should not be perceived as healthy enough to weight the emotional side of the balance. It’s more aberrant behavior than it is experiencing a true emotion.

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  140. 140
    query_squidier says:

    By David Losh @ 93:

    If you continue to pay, any bank, or credit union, any money, it is all profit to them.

    Um, my credit union is member-owned.

    From Verity CU’s website:
    “A credit union is a cooperative, not-for-profit financial institution. It is owned and controlled by members who share something in common, such as where they work or live. Instead of providing returns to investors, credit unions exist solely to serve the financial needs of members. Money made by the credit union is typically returned to members as more favorable rates, reduced fees, or additional services.”

    Am I missing something, Mr. Losh?

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  141. 141
    Herman says:

    By Herman @ 137:

    But two wrongs don’t make a right!

    Let me clarify what I meant by that. A loan where the lender knew in advance that borrower had no chance of paying back were ethically wrong. If that’s your loan, default away.

    But most loans were with ethical lenders and were made in good faith. Strategic defaults should not be ethically excused by making generalizations about those few loans that were not.

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  142. 142
    buystocks says:

    By Kary L. Krismer @ 106:

    RE: buystocks @ 105 – That’s typically part of the homestead rights, and in any case, assuming an inability to pay the bank probably won’t accept partial payments and probably prefers that the owner live there until the foreclosure. Empty houses are not a good thing for banks.

    But in the case of people that are “walking away” (ie. can afford to stay), this is just freeloading. How would one explain to their children why they are not paying room/board even though they have the means? I find it interesting that the keeping up with the jones’s mentality are what will cause both the high peak and the low trough of this bubble. First it was ok to go into unprecedented household debt, and now it’s ok to get free room/board…

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  143. 143
    David Losh says:

    Global economic melt down, who is responsible? The strategic defaulter? No, the banking industry, not just in this country, but globally, through cheap loans, contrived appraisal, and the illusion of economic growth. They deliberately over priced assets to generate these bogus loans. They sold the loans to the financial markets and pension funds bought them.

    I have news for you, but no one is going to be paying. Every Note is a time bomb.

    Banks have done nothing to make the situation better. They want business as usual. They need to be forced to make the situation right.

    Is it fair to let them keep the profits while millions of people lose everything? Maybe billions of people?

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  144. 144
    David Losh says:

    RE: query_squidier @ 140

    Credit Unions are worse, in my personal opinion.

    “Money made by the credit union is typically returned to members as more favorable rates, reduced fees, or additional services.”

    Is that the profits? I have a couple or three Credit Union loans and they are the most callous of lenders. I don’t see a difference in my interest rates and have been screwed mercilessly by Boeing Credit Union. I have clients who have been hounded for the most mundane fees, or defaults, by these brutal lenders. All in the name of the membership who they are protecting.

    They have made any number of bogus loans for the benefit of the membership. I think they are worse because they use this guise of good fellowship.

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  145. 145
    LMountain says:

    “However, while some individuals may still be fretting about their “moral obligation” to pay their mortgage, […] strategic default is really nothing more than a smart business decision.”

    Oh, well if it’s a BUSINESS decision, then by all means, you should ignore the moral and societal implications completely…

    Something tells me that “Fabulous Fab” would LOVE you, The Tim…

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  146. 146
    Sniglet says:

    Now my opinion is that it is ethically wrong.

    If you feel that defaulting on a mortgage is ethically wrong, do you feel the same about someone pawns their power tools and defaults on the loan (i.e. giving the pawn shop the right to sell the tools)?

    As I mentioned earlier, I fail to see the difference.

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  147. 147
    DrShort says:

    By Sniglet @ 146:

    Now my opinion is that it is ethically wrong.

    If you feel that defaulting on a mortgage is ethically wrong, do you feel the same about someone pawns their power tools and defaults on the loan (i.e. giving the pawn shop the right to sell the tools)?

    As I mentioned earlier, I fail to see the difference.

    In a pawn agreement, there is no promise to pay and transfer of ownership is not the result of a contract breach. It is spelled out as a valid form of payment in full.

    In a mortgage, there is a promise to pay and the foreclosure is (part of) a remedy for default.

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  148. 148
    David Losh says:

    RE: Sniglet @ 146

    Wait! Isn’t is about time for the podcast?!

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  149. 149
    query_squidier says:

    By David Losh @ 144:

    RE: query_squidier @ 140

    Credit Unions are worse, in my personal opinion.

    “Money made by the credit union is typically returned to members as more favorable rates, reduced fees, or additional services.

    Is that the profits? I have a couple or three Credit Union loans and they are the most callous of lenders. I don’t see a difference in my interest rates and have been screwed mercilessly by Boeing Credit Union. I have clients who have been hounded for the most mundane fees, or defaults, by these brutal lenders. All in the name of the membership who they are protecting.

    They have made any number of bogus loans for the benefit of the membership. I think they are worse because they use this guise of good fellowship.

    I hear you, David, but everyone I know except you who uses BECU loves them. And I have had a very nice experience with Verity so far (I opened the accounts early this year when I left Chase).

    Now granted, these rates aren’t amazing but I’m getting around 1.5% on my checking account and 1.25% on a 6 month CD (in lieu of a savings account with a dismal interest rate (this also represents the bulk of my future house down payment)). I was also able to secure a $10k credit line (which I don’t use; got it to maintain my FICO) at only 6.75% APR. I also moved a big chunch of my money from a large investment provider to Verity and have it in a couple mutual funds and haven’t had any issue.

    A lot of my initial fees were waived, I get a payback for non-Verity ATM fees, and the only thing they’ve asked me to do is remove my baseball cap when entering the branch.

    And they’ve got a free-for-members coins-to-cash machine! (I still need to empty those jars.)

    All said and done, they’re leaps and bounds over Chase (or WAMU for that matter). I’m no financial guru, but given the above, does that sound undesireable to you?

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  150. 150
    dancingeek says:

    By S. Marty Pantz @ 69:

    In the cell phone example, I have not yet received the other 22 months of service when I “walk away.” I have paid for all the services I received, then chose to discontinue the service. In the mortgage example, however, some real estate seller wanted $X for his/her property and I agreed to buy the property for that amount. But I did not have the money to pay cash for it, so I borrowed the funds from the bank. The bank paid the seller for me and I agreed to repay the bank for the money it put out via a mortgage contract. Walking away from that obligation is vastly different, IMO.

    Actually, the reason for the phone contract is that the carrier is paying the majority of the cost of the phone, ie a phone will be $200 with a contract and $600 without. The carrier is “loaning” the consumer $400 to buy the phone with the intent of recouping the loan over the life of the contract. The monthly fee is partially for cell service, and partially for debt service. Look at T-Mobile’s pricing structure for a very clear example of this. Since recouping the phone itself is of questionable value (taking the property), they use an Early Termination Fee as “collateral.”

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  151. 151
    Scotsman says:

    RE: Jonness @ 135

    “The banks purposefully increased their risk exposure in an attempt to make bigger profits. This has turned out to be an extremely poor business decision on their part.”

    “Unfortunately, instead of suffering the consequences of the contracts they signed, they have managed to buy enough politicians to transfer the losses to the other party via publicly held debt. That’s where the main ethics violation has occurred.”

    These two statements are the crux of the matter. The first is absolutely correct and should trump any discussion of “ethics’ on either party’s part. The second statement captures what will perhaps the most damaging aspect of the whole matter. It’s not the individual lapses of judgment or ethics that should concern us so much as it is the change in the interests of government. Instead of serving the people, government now unequivocally serves special interests through the privatization of profits and the socialization of risk/losses. In the long run that change will hurt us more than any group of individual defaults.

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  152. 152
    LeftOverpricedSeattle says:

    By The Tim @ 66:

    By LeftOverpricedSeattle @ 62:
    I refuse to follow their moral and ethical compass. The minute I start using their methods, I lose far more than the money I might owe them.

    If you don’t want to play their game, then don’t play their game at all. But if you play their game by getting a loan, then you apply a different, more strict set of rules to yourself than those that the bank will be playing by, you’re pointlessly setting yourself up to be screwed.

    I think this is where we differ. When I signed on the dotted line, I made a commitment both to the bank and myself and the way I live my life in order to fulfill my end of the obligation, regardless of what the other party may do. If I run into financial hardship, it is incumbent upon me to fulfill my obligation to pay that loan. If I cannot pay, then I need to ask them to forgive the debt, which they may or may not do. If they don’t, then I am on the hook for what I owe them. I have to sell the house for what I can, and set up a payment to repay the debt if they refuse to forgive it.

    They may be greedy bankers out to screw me, but so what? It’s only money, and they cannot collect it from me when I am dead anyway. I cannot follow their ethical code, even if it makes me look like a sap when they take advantage of me for following a higher authority.

    Do you stop yourself from doing it because you think it is “wrong”, or because it is “against the law”?

    Both (but primarily the former). But I still see no compelling argument that opting for the default provision in a mortgage contract is “wrong.”

    As I said, I find strategic default to be morally and ethically wrong because the rules I live by tell me it is wrong. The rules I live by tell me I would be violating two of the 10 Commandments, namely stealing (even if it is from the bank, it’s still wrong) and bearing false witness (not paying, even when I have the ability to do so, is a lie).

    Banks don’t have to follow those same rules and they haven’t been following them for thousands of years (see the Cleansing of the Temple in the Gospels and the money changers being called a “den of thieves”).

    Now, if I cannot pay due to financial hardship and all my avenues are exhausted, then I can ask the bank to take my deed in lieu, accept a short sale, or just forgive any outstanding balance. If they choose to let me off the hook for the debt, then morally and ethically, according to the rules I live by, I am not guilty of breaking any Commandments.

    If, however, they choose to ask me to repay, then my obligation is to repay, even if it means working longer hours, getting by with less, etc.

    This is probably why the Bible I read frequently warns me against having debt in the first place, because it can lead to SO many problems that can be easily avoided.

    As I said, if following those rules makes me a sap and sets me up to be screwed in this life, so be it. My biggest debt payment comes later and is already forgiven.

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  153. 153
    Herman says:

    RE: Sniglet @ 146 – I agree with DrShort’s response to your question.

    Here’s one for you – is it ethically wrong for a lender to entice a borrower to take on a loan that they know is engineered in a way that the borrower will have no realistic chance to repay? Or is it morally excused because every borrower should be smart enough to see that for themselves?

    Keep in mind we’re not talking about what’s legally correct, we’re talking about ethics.

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  154. 154
    Scotsman says:

    Here’s a question- are the penalties for strategic default severe enough, or is the anger directed at them in part because we feel they (defaulters) have indeed benefited out of proportion to the costs paid? Sure their credit is trashed for some (probably) short period of time, but they did get to live in a nice house, etc. What were the benefits of entering a loan they knew they couldn’t pay verses the costs they now face? Are they in balance?

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  155. 155
    Chris says:

    Strategically defaulting is a perfectly legitimate course of action on a contract. It’s also unethicall to break a promise to pay (at least that’s how I was raised). Contracts facilitate the rule of law and allow transactions to proceed objectively – they are amoral in my opinion. But having a process in place to accomodate a breach of contract shouldn’t be confused with condoning a breach or making it ethical.

    Maybe some day there will be a remake of Les Miserable where Jean Valjean strategically defaults on his mortgage, the banker of Digne reminds him to default on his credit card debt as well, and Javert the debt collector hounds Jean mercilously for the rest of his days. It seems the tale of ethics and financial survival has been told before.

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  156. 156
    DrShort says:

    By Scotsman @ 154:

    Here’s a question- are the penalties for strategic default severe enough, or is the anger directed at them in part because we feel they (defaulters) have indeed benefited out of proportion to the costs paid? Sure their credit is trashed for some (probably) short period of time, but they did get to live in a nice house, etc. What were the benefits of entering a loan they knew they couldn’t pay verses the costs they now face? Are they in balance?

    One benefit that hasn’t been talked about is the IRS rule suspending the tax on forgiven mortgage debt. Up until recently, cancelled mortgage debt would be counted as income and taxed accordingly.

    http://www.irs.gov/individuals/article/0,,id=179414,00.html

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  157. 157
    Sniglet says:

    Wait! Isn’t is about time for the podcast?!

    Yup. I just finished the show for tonight. We always do it live (i.e. so people can call in). Then it is automatically made available as a podcast about half an after the show is over.

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  158. 158
    Helmut says:

    RE: DanInEdmonds @ 124RE: The Tim @ 63

    The problem with this discussion seems be a lack of differentiation between legal and moral. The argument that your mortgage, which you intended to pay back, is just a legal contract with clauses for failure to pay makes it OK doesn’t work for me. It may be within your right under the contract to choose not to pay, even if able to, and I’m sure the majority of people probably wouldn’t feel the least bit upset to exercise their rights under the contract, but that doesn’t mean it is ethical or moral to do so.

    The arguments that it’s ethical to choose not to pay seem to be:

    1) Banks are mean, they suck, and they shouldn’t have given me the loan anyway (I almost agree with this, and would add, that if taxpayers weren’t obligated to support failing banks we probably wouldn’t have a thread about this, or a site about a housing bubble in the first place. Furthermore, there wouldn’t be a slew of people having to ponder whether it is ethical for them to walk away from their contract, because they wouldn’t have been given loans to begin with.)

    2) It’s just a legal contract, and I’m not violating the law

    3) Evil corporations and developers are doing the exact same thing, so why can’t I?

    None of these arguments in my mind have anything to do with answering whether this decision is ethical. If you enter into a contract, and have the ability to hold up your end of the contract and choose not to, for what amounts to “because I don’t want to anymore”, then in my opinion, that is unethical. If the developer in Manhattan had the ability to service the 2 billion in debt, and chose not to, then that in my opinion is also unethical. It may be legal, and I’m glad that everyone can choose not to abide by the terms of a written contract they agreed to, even though nothing has changed their ability to meet their obligation, and still feel really good about themselves, but it is still unethical.

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  159. 159
    S-Crow says:

    Are we moving into an era where we are now blessing the blatant disregard of the obligations we enter into? Now that precedent has been started, where will it lead to? Walking away even in the midst of being perfectly able to proceed with your obligations, starts a very slippery slope with dangerous ramifications.

    Has anyone been reading or watching video clips about Greece lately? If so, there’s your shining example of what can occur when citizens decide to collectively skirt obligations. Domino’s start falling.

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  160. 160
    patient says:

    RE: S-Crow @ 159 – Noone is encouraging a general diregard for obligations. The regard for law and lawful obligations needs to be fulfilled for society to function. Ehtical obligations is a total different matter, especially since the ethical scale is not as black and white as the law. Imo there is an ethical component to a strategic default but it’s up to each and everyone to decide if you are willing to live with it without some kind of public witch hunt. You can argue that it’s your obligation to report any violation of the law. Do you call the police if your spouse is speeding when you are the passenger? Probably not. If your parking has expired? Probably not. Is it a moral, ethical or even lawful violation of your obligations as a citizen?

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  161. 161
    Sci Ry says:

    Choose to default on a mortgage is unethical. There should be no question about it, and frankly, I am quite disappointed with the majority of people here who think that it isn’t. THIS is quite a bad sign for our society.

    It is unethical to make a “strategic” default. Just like it is unethical to raise a white flag of surrender but then attack. As many have pointed out, it is quite a different story if you default because you lost your job, had a medical emergency, or were swindled. There are recourses for each of these (e.g. bankruptcy, civil court).

    A mortgage is a contract, but your reputation is part of that contract. A contract can easily work for two unethical parties, but just because various consequences are spelled out in the contract, it does not release you from the ethical consequences of the decision.

    Let’s try this analogy: I am a wheat farmer, and I enter into a contract to sell 1000 bushels of wheat to you for $30 per bushel in six months when I harvest it. That contract gives me some financial stability, but it is also a gamble; in six months, the price of wheat might be $50 per bushel or it could be $15 per bushel. However, it would be completely unethical of me to purposely break my contract with you at harvest time just because I could sell it at $50 per bushel (i.e. when it suited me economically). Farmers who behave that way will have a hard time finding anyone to deal with, rightly so.

    When you sign a mortgage, it is your reputation on the line. Of all the people who feel that they are not obliged to pay the mortgage when the house price drops, how many of you would feel obliged to give the bank any profit when the house appreciates in value? As people pointed out before, a mortgage is not an options contract, you agreed to pay whether the price increased or decreased.

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  162. 162
    patient says:

    RE: patient @ 160 – To me it comes down to where do you rate this ethical violation? Personally I rate it extremely low due to the lenders ability to control the collateral and assess the risk prior to signing the contract. They are in the driver seat for these things not the borrower. And again these defaults are not the cause of all the pain they are part of the symptoms. The cause is the lending.

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  163. 163
    Sci Ry says:

    In a just society, morals and ethics should be aligned with the law.

    As for Greece, while their debt was bad, the USA’s debt was worse (as a function of GDP) back in ’44 (I believe), yet we were able to grow ourselves out of it. Greece’s debt became much worse because the “wolf pack” banks targeted it using financial instruments that would have been illegal before 1982. Laying sole blame on the people of Greece amounts to letting Goldman Sachs (and others) get away with all that they do.

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  164. 164
    mariner22 says:

    1. Morgan Stanley buys 5 office buildings in San Francisco at the peak of the market and walks away from them as it is a bad business decision to pay the mortgages.

    2. AIG writes billions in credit default contracts they cannot pay, and US taxpayers socialize the losses by paying off the insurance

    3. Goldman Sachs gets money from the Fed at near zero and uses that money to front run the biggest dead cat bounce in the history of the world, having trading gains every single day

    4. JP Morgan,Citigroup, Fannie, Freddie….this could go on forever

    What does “wrong” have anything to do with it?

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  165. 165
    The Dude says:

    I think the ethics of walking away from a mortgage depends on the assumptions made by each party when the contract was signed.

    If the lender assumed you might walk away, then it’s ethical to do so. You are simply doing something the lender thought you might.

    If the lender assumed you would not walk away, and you knew this, and you assumed that you might walk away but did not discuss this with the lender, then it seems unethical to do so. Even if it’s not written in the contract, you are violating an implicit agreement you made with the lender.

    If either the lender or you did not consider this possibility when you signed the contract, then it’s an ethical gray area. There was no mutual agreement on this scenario, so it doesn’t seem completely fair for you to walk away, but it doesn’t seem completely fair for the bank to expect you to *not* walk away either. Maybe the ethical solution is to split the loss with the bank in proportion to the amount you each *should* have considered this possibility?

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  166. 166

    “Instead of serving the people, government now unequivocally serves special interests through the privatization of profits and the socialization of risk/losses. In the long run that change will hurt us more than any group of individual defaults.’

    Completely agree, though I’m not sure that a government serving special interests is a real recent thing.

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  167. 167

    By Sniglet @ 146:

    Now my opinion is that it is ethically wrong.

    If you feel that defaulting on a mortgage is ethically wrong, do you feel the same about someone pawns their power tools and defaults on the loan (i.e. giving the pawn shop the right to sell the tools)?

    As I mentioned earlier, I fail to see the difference.

    I’m not familiar with how pawn shop contracts are drawn up, but I suspect that even there the pawn shop would much prefer to be paid. I’m not sure why you think that defaulting on such a contract would be any less unethical than defaulting on any other loan. Just because something might be statistically more likely doesn’t make it any more ethical. Also, I would suspect that there are relatively few people that strategically default on a pawn shop loan. More likely it’s inability to pay if they had to go that route in the first place.

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  168. 168

    By query_squidier @ 149:

    By David Losh @ 144:
    RE: query_squidier @ 140

    Credit Unions are worse, in my personal opinion.

    They have made any number of bogus loans for the benefit of the membership. I think they are worse because they use this guise of good fellowship.

    I hear you, David, but everyone I know except you who uses BECU loves them. And I have had a very nice experience with Verity so far (I opened the accounts early this year when I left Chase).

    In bankruptcy CUs used to put far more pressure on debtors to reaffirm debts than other banks. Yes it was the debtor’s decision whether or not to reaffirm, but in some cases where there was heavy pressure it was clearly not in the debtor’s interest to reaffirm and I would call their actions heavy handed. About the only time I remember a bank doing the same was someone from BOA that was from Oregon and didn’t understand Washington law or BOA’s practices in WA.

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  169. 169

    By dancingeek @ 150:

    Actually, the reason for the phone contract is that the carrier is paying the majority of the cost of the phone, ie a phone will be $200 with a contract and $600 without.

    Not necessarily. Some carriers make you recommit for simple things like changing plans. The reason that the termination fees are now variable (depend on length of time to termination) is the threat of class action suits for improper termination fees. I suspect that practice would be subject to the same type of action.

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  170. 170
    S-Crow says:

    A lot of comments seem to lean on “this is strictly a business decision.”

    Ok, let’s say it is solely a business transaction. Homeowner’s who entered into purchase and sale agreement, arranged financing, approved of the terms in the note and DOT, signed escrow instructions specifically stating that they approved all the instruments to move to closing and bought “strictly as a business” decision—–> lost your business “investment” because going in you thought real estate values ONLY go up. In addition, you decided to refinance (serially) and have me disburse a proceeds check for tens of thousands, even into the six figures sometimes to buy another property levered up to the chin and now you find yourself in financial misery. Again, you lost and now wish to socialize the poor decisions on the backs of collective citizens of the country. My values and ethical standards say that is not just unethical, but immoral.

    I distinctly recall conversations with my spouse that the very transactions we were closing were probably going to crash the market and throw a lot of people out of work through layoffs etc.. never mind the enormous cost of the social life preservers in place called unemployment benefits. Would anyone venture to guess what our unemployment rates for our company went up to? It is nauseating.

    I’m going to walk away from my lease because my income has dropped 50% and I didn’t plan for a rainy day. It’ business.

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  171. 171

    By Scotsman @ 154:

    Here’s a question- are the penalties for strategic default severe enough, or is the anger directed at them in part because we feel they (defaulters) have indeed benefited out of proportion to the costs paid? Sure their credit is trashed for some (probably) short period of time, but they did get to live in a nice house, etc. What were the benefits of entering a loan they knew they couldn’t pay verses the costs they now face? Are they in balance?

    I don’t have a problem with the balance overall, because in most states (except CA) the bank probably has the option of actually suing the debtor, so the risk of strategic default is significant.

    What I have a problem with is two things. First, I think both Freddie and Fannie are making it easier for people who have gone through foreclosure to get another loan. I think they do try to exclude the strategic defaulter, but I’d question how good they are at actually screening them out.

    Second, more needs to be done to have continued liability for those that damage the property prior to moving out. Removing doors, molding, electrical, etc. I suspect it already is a crime where the lending entity is federal, but I’d like to see civil liability.

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  172. 172

    By S-Crow @ 159:

    Are we moving into an era where we are now blessing the blatant disregard of the obligations we enter into? Now that precedent has been started, where will it lead to? Walking away even in the midst of being perfectly able to proceed with your obligations, starts a very slippery slope with dangerous ramifications.

    Has anyone been reading or watching video clips about Greece lately? If so, there’s your shining example of what can occur when citizens decide to collectively skirt obligations. Domino’s start falling.

    I think it’s just an outgrowth of the development in the US where nothing is anyone’s fault. It’s always the fault of someone else.

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  173. 173

    By DrShort @ 156:

    By Scotsman @ 154:
    Here’s a question- are the penalties for strategic default severe enough, or is the anger directed at them in part because we feel they (defaulters) have indeed benefited out of proportion to the costs paid? Sure their credit is trashed for some (probably) short period of time, but they did get to live in a nice house, etc. What were the benefits of entering a loan they knew they couldn’t pay verses the costs they now face? Are they in balance?

    One benefit that hasn’t been talked about is the IRS rule suspending the tax on forgiven mortgage debt. Up until recently, cancelled mortgage debt would be counted as income and taxed accordingly.

    http://www.irs.gov/individuals/article/0,,id=179414,00.html

    This is one difference that the business people don’t get the advantage of (assuming the debt was recourse).

    One thing I’m not clear on is whether the homeowner would have to reduce their tax attributes by the amount of canceled debt. I suspect the answer is yes, so for some this exclusion might still be costly.

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  174. 174

    By Jonness @ 139:

    By Kary L. Krismer @ 133:
    I don’t think anyone here would argue it’s totally ethical to not pay your mortgage if you can, and instead the disagreement is more over how unethical it is.

    I emphatically disagree with that statement. The ethical obligation one feels to pay their mortgage if it is not in their best interest is nothing other than social brainwashing. Financial decisions are best made free of emotions brought about by years of brainwashing. When thinking financially, pure logic leads to the best decisions. Emotions should be reserved for more pure forms, such as creating original art or interacting with a loved one..

    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.

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  175. 175
    Scott Weitz says:

    Many wouldn’t have to go this route if banks would use some of their free money, and write down principal balances or accept short sales without deficiencies.

    This is purely a business decision. Do I want my neighbor doing it? Of course not, but I understand why he would if our state allows it.

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  176. 176
    alex says:

    Consider the case of an old lady who paid her mortgage for 25 years out of the 30… so it’s just about paid off. Then she’s ill for a while and can’t pay the mortgage.

    The bank has the right to take the old lady’s house and keep a whole lot of her equity (all turned into fees and extra interest), if not the entire equity.

    Does the bank feel any guilt or shame in that situation? No, it’s just business.

    HOWEVER, what I do find maybe a little bit questionable is when a blog like this takes a stance in favor of strategic defaults.

    Convincing its readers to walk away is the single most powerful leverage that SeattleBubble has to make its predictions come true.

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  177. 177
    Sniglet says:

    I’m not familiar with how pawn shop contracts are drawn up, but I suspect that even there the pawn shop would much prefer to be paid.

    Actually, pawn shops generally prefer to have their clients default than make good on the loan. The amount of money lent on any pawned item are generally a fraction of the re-sale value. Thus, pawn shops almost always make more money when selling items for which clients have failed to pay the loan.

    This is a lesson that mortgage lenders would do well to learn. Of course, pawn shops also routinely charge interest rates which are in excess of 15% (and even 20%). They HAVE to make their businesses profitable since no one will be bailing them out.

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  178. 178
    Costco Mike says:

    RE: Kary L. Krismer @ 174 – That Risk has lead to some of the best scientific discoveries and social norms that we use today. Going against society while risky can lead to great things. You can’t have one without the other.

    Saying something is unethical is subjective to the social parameters that you operate under and have absorbed through your life experiences. Any claim that someone else’s views are unethical are invalid because of micro and macro cultural/social influences of the other person. What some are saying unethical comes from the assumption that they hold the social norm. Unless you can poll the world and get a solid answer the claim of what is and isn’t ethical is exactly that a claim, not a fact.

    The younger generation that will be doing most of the purchases of homes in the next decade will set a norm they find valuable to their experiences. The housing and economic issues we have experienced will have a direct effect on that and create new norms for the generations to adjust to. For those posting it is unethical it may have been but might be ethical now.

    Personally, I see at as a contract and business leaders, our government, and large corporations all use this situation/tactic as a tool to be successful. Why shouldn’t the people that fuel all of those things be able to as well?

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  179. 179
    Ryan says:

    By S-Crow @ 159:

    Are we moving into an era where we are now blessing the blatant disregard of the obligations we enter into? Now that precedent has been started, where will it lead to? Walking away even in the midst of being perfectly able to proceed with your obligations, starts a very slippery slope with dangerous ramifications.

    Has anyone been reading or watching video clips about Greece lately? If so, there’s your shining example of what can occur when citizens decide to collectively skirt obligations. Domino’s start falling.

    S-Crow-

    I think we are moving into an era where the consumer and general public awakens to the games and disregard they have been subject to courtesy of the rigged stock market/Wall Street and the corrupt regimes that rotate thru DC. This cycle is as old as time and is unstoppable. The other side of the obligation has always had disregard for the little person (ie. insurance companies refusing to pay, shareholders getting burned by bad decisions in mgmt, etc.). I say lick the banks and my 800+ credit score b/c I am tired of being taken advantage of.

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  180. 180
    2kt says:

    It’s time to change the site’s name. Something like “Seattle bottomfeeder” should be quite reflective of its true nature.

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  181. 181
    query_squidier says:

    By Kary L. Krismer @ 168:

    By query_squidier @ 149:
    By David Losh @ 144:
    RE: query_squidier @ 140

    Credit Unions are worse, in my personal opinion.

    They have made any number of bogus loans for the benefit of the membership. I think they are worse because they use this guise of good fellowship.

    I hear you, David, but everyone I know except you who uses BECU loves them. And I have had a very nice experience with Verity so far (I opened the accounts early this year when I left Chase).

    In bankruptcy CUs used to put far more pressure on debtors to reaffirm debts than other banks. Yes it was the debtor’s decision whether or not to reaffirm, but in some cases where there was heavy pressure it was clearly not in the debtor’s interest to reaffirm and I would call their actions heavy handed. About the only time I remember a bank doing the same was someone from BOA that was from Oregon and didn’t understand Washington law or BOA’s practices in WA.

    I had to educate myself regarding this reaffirmation of debts (thankfully don’t know much about bankruptcy). I’m assuming by heavy-handedness you’re saying that after someone went bankrupt and had loans or whatever through the credit union that the CU leaned on them pretty hard to reaffirm that debt so it was paid back? I’m surprised banks aren’t known to do that. But perhaps CUs’ vunerability to having a debtor not pay back debt is greater than a bank.

    Anyway, thanks for your input, Kary.

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  182. 182
    meadows says:

    What a wild and crazy thread!

    What about a marriage contract? I assume most of us presume it is entered into with the full intent of a lifetime agreement as stated. Whoops, maybe only less than half the time, the road to Hades is paved with romantics. Is it unethical to get a divorce when the marriage is an unfixable failure? Yeah, to fundamentalists, it’s a moral failure. To rational people, not necessarily. It’s gray, not black and white.

    I suppose there are a minority that enter into the marriage contract as grifters of some sort. Likewise a minority entered into mortgages as grifters. Plenty of bankster grifting out there, too! I think banks want borrowers to treat the mortgage contract like a marriage contract, “..till death do us part…” and I’ve read of 100 year mortgages in Japan.

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  183. 183
    Brenton says:

    RE: The Tim @ 26

    Strategic default of a mortgage does have an effect on the general population. Lets not pretend that it does not. Widespread strategic default lowers property values and hurts your neighbors. Yes, those neighbors are beyond stupid for purchasing an obviously overpriced home, but so were you.

    So trying to pretend that strategic default has no moral or ethical elements in it is just putting the blinders on.

    Its a situation where in a normal situation, strategic default is nor immoral or unethical. When its widespread like it is now, it does cause significant economic damage, as we have seen.

    Like the saying goes, paraphrased, “no single raindrops blames itself for the flood”.

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  184. 184
    The Piper says:

    So if someone is currently destitute and has no money to pay with, then it is okay to default.
    And if someone suffered an unexpected loss of some sort and will very shortly not be able to pay then it is okay to default.
    And if someone runs all the numbers and can see that, even though they can pay right now, within the next five to ten years they will almost certainly be destitute and have no money to pay their mortgage with. Then what? They’re unethical for cutting their losses now? Or would ethics would require them to wait out those five to ten years so that they actually are destitute before they default on their home? Even though those 5-10 years of payments won’t make much of a difference to the bank’s bottom line, and even though their destitution will likely mean that they will require food stamps or other public assistance, and they still defaulted so they have the trashed credit score and ‘broken’ contract anyways? That just sounds like an exercise in futility.

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  185. 185
    The Tim says:

    By Brenton @ 183:

    Strategic default of a mortgage does have an effect on the general population. Lets not pretend that it does not.

    You’re arguing against a straw man here. I never said that foreclosures have no effect on society as a whole. I said that someone choosing to strategically default is not having a direct detrimental effect on others. The effects are indirect, and arguably primarily (if not entirely) the fault of the bank for failing to properly price their risk.

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  186. 186
    terrin says:

    Not sure why you separate the issues. The reality is when contracts are drafted by mortgage companies, they understand state law because they influenced the drafting of them. Fact is most states allow borrowers to reside in their homes after a foreclosure for a set period of time. In Michigan it is six months. Fact is banks have an unfair bargaining position and use that muscle to draft laws that favor them Banks all the time. It hardly is unethical to take advantage of the few instances when laws benefit consumers.

    As a bankruptcy attorney, I can tell you banks truly are unethical. Take for instance when you sign a mortgage. You can take the time to find a great mortgage company in terms of customer service. Yet, even if the mortgage specifically forbids the assignment of that contract, Banks can assign the contract with no penalty after the mortgage is signed. So, despite your effort, you are now stuck with the bank with the worst customer service record.

    Another example is credit cards. I can’t tell you how many people file bankruptcy because the banks all the sudden doubled their interest rates o their credit cards despite continuously paying the cards balance on time for years. The reason for the increase: the banks just want to make more money. So now you get to pay thirty percent interest when the bank borrowed the money from the federal reserve at zero percent.

    By The Tim @ 1:

    Note that I am just talking about the financial action in this post, not the decision that some people have made after they stop paying their mortgage to continue living in the home as long as possible. I absolutely believe that there are serious ethical questions when it comes to that aspect of strategic default.

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  187. 187
    Ani M says:

    RE: @ – Why should the average guy on the street be the only one in the transaction being held to an ethical standard?

    Ethical standards? During the bubble, lenders made loans to people knowing they could not pay. They falsified documents on behalf of loan applicants. They charged subprime borrowers usurious interest rates and fees. Loan officers were given huge incentives, often thousands of dollars per transaction, to give borrowers the worst possible loan terms. They used “preferred appraisers” who were part of the game, making sure that values always came in on target so that everyone would get paid. These same lenders discouraged people from shopping for better rates and terms by telling them that the offer would expire or that an additional credit inquiry would ding their score. They made a fortune.

    Ethical standards?The banks who bought these loans (and encouraged the poor lending practices) then bundled them to hide their toxicity, knowing full well that defaults were inevitable. They sold them to retirement funds and small investors as “A” grade investments knowing that a large number of them would fail, wiping out investors and retirees. They did all of that while simultaneously betting against the very products they recommended to average people, making themselves even richer after the meltdown. They planted the bomb that blew the economy, but they made a fortune.

    Ethical standards? The builders who were tossing houses up as fast as they could find crews to build them were charging insane prices that went up month after month while their costs remained the same. Fueled by cheap credit, small-time investors bought and flipped houses, sometimes reaping enormous profits in a matter of weeks without adding value (renovating) to justify the price. They all made a fortune too.

    But you, little guy working two jobs to make ends meet. Yeah, you, the honest guy struggling to paycheck to paycheck, paying your bills, sending your kids to school, bringing lunch from home to save a buck…YOU are unethical if you decide not to keep giving that bank payments on a $500,000 mortgage for a house worth $260,000 now. The same bank who screwed you. The same one you just bailed out with your taxpayer dollars. Shame on you for not continuing to give them your money.

    I understand the sentiment behind not feeling too sorry for people who used their homes for frivolous cash-outs and those who bought beyond their means. But a strategic foreclosure isn’t about walking away from the consequences of poor judgment. Its saying ENOUGH! to paying twice what your new neighbor is paying on a mortgage, even though you can. Even if you’re willing to swallow that bitter pill and keep paying, what about the people whose lives have changed in the last few years? That condo doesn’t have room for the new twins. There’s a job offer in another state. Your elderly parents need you closer to home. You’ve been laid off or your commission-driven or self-employment income has decreased drastically in the recession. Whatever the situation – the housing crisis has left millions of people unable to move because they owe more than the house is worth and they were denied loan modification. So unless they’ve got tens or even hundreds of thousands in cash to bring to the closing table, they cannot sell, no matter how much they want or need to. After being screwed by everyone along the way, WHY should it be incumbent on them to be the ONLY party in the transaction to continue acting in good faith?

    As for strategic default, the strategy part is key. You can probably rebuild your credit score decades before you’ll ever see equity on that $500,000 house. Don’t stand on some imaginary ethical standard that only applies to mortgage borrowers, do exactly what the big banks and corporations do when they’re in a losing proposition – use the provisions of the default clauses in your contract to cut your losses and go.

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  188. 188
    Kristina says:

    What it boils down to isn’t what is legal, it is what kind of person do you want to be? It doesn’t really matter if you’re dealing with a sort of “Bailey Building Fund” outfit who cares about you or not. What matters is if you are a person, who, after giving his/her word, is going to keep it. I think the social contract in many ways is breaking/has broken down in our society, not least because of this kind of legalistic sophistry which lets people off the hook for breaking their word.

    People seem to be working very hard to convince themselves that being dishonest is OK if they can prove that the other guy is a scoundrel. Well, personally, I like to think that the lowest common denominator is not my best guide to ethical behavior.

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  189. 189
    terrin says:

    Robin hood stole from the rich to help the poor. Yet, he is viewed as a hero. Ethics are in the eye of the beholder. I’d, however, certainly put most borrowers in the role of the victimized. The reality is the mortgage industry is poorly regulated, which seems strange considering the enormity of the money being borrowed and the effects homeownership has on the whole community as you state.

    The reality is that for the longest time there was a mysticism in America that banks and government helped permeate. Namely, real estate is a wise investment because the value always goes up. Why pay rent, when you can build equity in a home? It was always taught that you could use that equity to later retire on if needed.

    Building on that engrained tenant of American life, it was common for mortgage companies to sell ARM mortgages by promising borrowers that the borrowers could always refinance when the ARM was set to adjust if the rates are going to go up. That turned out to be false and borrowers couldn’t refinance.

    Borrowers were being irresponsibility sold loans by both banks and government on an ideal that failed to be grounded in fact.

    When one enters into a business relationship with another party, both parties have a legal obligation not to undermine the value of the other parties investment. Doing so is considered a breach of contract. Mortgage companies by recklessly lending and engaging in credit swaps breached that legal obligation by putting their borrowers investments at risk. So, arguably when one decides to walk from an upside down mortgage, the contract was already breached by the mortgage company.

    As for your lease. It is not unethical to walk away from your lease. Most leases have liquidated damage clauses. By agreeing to the lease, you are agreeing to be held accountable for those damages as spelled out in the contract. If no such provisions were included in the contract, state law provides the remedy.

    By S-Crow @ 170:

    A lot of comments seem to lean on “this is strictly a business decision.”

    Ok, let’s say it is solely a business transaction. Homeowner’s who entered into purchase and sale agreement, arranged financing, approved of the terms in the note and DOT, signed escrow instructions specifically stating that they approved all the instruments to move to closing and bought “strictly as a business” decision—–> lost your business “investment” because going in you thought real estate values ONLY go up. In addition, you decided to refinance (serially) and have me disburse a proceeds check for tens of thousands, even into the six figures sometimes to buy another property levered up to the chin and now you find yourself in financial misery. Again, you lost and now wish to socialize the poor decisions on the backs of collective citizens of the country. My values and ethical standards say that is not just unethical, but immoral.

    I distinctly recall conversations with my spouse that the very transactions we were closing were probably going to crash the market and throw a lot of people out of work through layoffs etc.. never mind the enormous cost of the social life preservers in place called unemployment benefits. Would anyone venture to guess what our unemployment rates for our company went up to? It is nauseating.

    I’m going to walk away from my lease because my income has dropped 50% and I didn’t plan for a rainy day. It’ business.

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  190. 190
    ME says:

    A few comments from a LENDER. Yep. Thats me. The guy who loaned you the money for the house. The bank.

    First. You don’t get a mortgage. You GIVE a mortgage. You get a loan. The bank gets the mortgage in exchange for lending the money.

    And the mortgage contract does not state you only promise to pay. The mortgage contract, which is actually called a trust deed or a deed of trust and note says you promise to repay OR…I REPEAT.. OR you give up the collateral.

    That means regardless of what you do. Pay or walk…you are fulfilling the contract. Please understand this basic fact.

    Paying the payment fulfills the contract. Walking…which leads to repossesion in the form of foreclosure also fulfills the contract.

    As for ethics. Sorry. None of it is unethical. None. Regardless of the reason. What many of you may not know is many loans have mortgage insurance, which is specifically designed to pay the lender in the event of default.

    So if you walk…which leads to foreclosure, many times the bank will recoup the loss with a MI claim. Is it still unethical?

    What about if the bank profits from a foreclosure. Forget the walking away talk. That is simply a precursor to foreclosure. The real argument is whether foreclosure is unethical, beaue that is what walking away ultimately causes. What if foreclosue allows the bank to profit. Trust me…it happens. Stubborn homeowner can’t pay the payment, won’t selleven though they have equity. foreclosure. Bank makes money. Still unethical?

    Here is what is unethical. You pay the payment on time every time. Bank still forecloses on your home. That is unethical. Of you stop paying and are allowed to keep the home without relenquishing the collateral. That is unethical.

    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.

    It is aboslutey not unethical immoral or wrong in any way to excercise either part of the loan contract. If it were the contract would become unenforceable.

    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.

    And people break contracts every day. The cell phone example. Divorce. Speeding. Financial contracts. Social contracts. Does breaking other contracts make them immoral?

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  191. 191
    The Dude says:

    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.

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  192. 192
    Heretic says:

    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.

    Yes, the banks accounted for the possibility, and you paid for the right to walk away at about $800 per $100k borrowed:

    The morality argument is especially weak in a state like California or Arizona, where mortgages are so-called nonrecourse loans … Under these circumstances, deciding whether to default might be no more controversial than deciding whether to claim insurance after your house burns down.

    In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed.

    http://www.nytimes.com/2010/01/24/business/economy/24view.html

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  193. 193
    Scott Weitz says:

    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’.

    The real unethical behavior was and is writing loans that banks knew/ should have known could not be paid over time. They blatantly ignored underwriting standards because they could sell the loan to Fannie, Freddie or Wall Street who would bundle them up and sell them to Pension Funds and Swedish Municipalities, etc. Everyone would make a big profit in the short term and get paid big bonuses.

    In regards to ‘walking away’: We are in an unprecedented era. Not even prior to the Great Depression was the irrational exuberance so prevalent across the populous for a single asset class (real estate). What’s worse is that the particular asset class touches nearly all Americans. For nearly a decade, we, as a society, simply gave into the greed…everyone from the banker, the realtor, the mortgage broker, the borrower, and even the government. Everyone loved all the fake gains. Clearly the party is over -we have to pay the price and deleverage. Our current solution: ‘more debt’ – does not solve a debt problem…it extends it and eventually makes it more dangerous.

    With that precursor, homeowners have to do what is best to put food on the table both today and three years from now. If that means walking away from a mortgage that will eventually wipe out their assets or financial well-being….then so be it.

    In effect, its the worlds most interesting and toxic game of musical chairs – but unfortunately, it is necessary to truly recover.

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  194. 194

    By Ani M @ 187:

    RE: @ Ethical standards? During the bubble, lenders made loans to people knowing they could not pay. They falsified documents on behalf of loan applicants.

    As to this point, the loan applicant is also responsible for reviewing the application that they sign. To the extent the application is false, then both the loan originator and the applicant are at fault, and in extreme cases committing fraud. There’s likely third parties involved (the entities that end up buying the debt) that are the ones being affected.

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  195. 195
    Adam says:

    By Sniglet @ 51:

    I it just doesn’t make sense for your family, or even the broader economy, for you to keep hanging on by a thread.

    Let’s face it, the vast majority of people who manage to get loan modifications end up re-defaulting anyway. This doesn’t help anyone. It is far better for people in this situation to just throw in the towel and re-adjust their family expenses (i.e. by finding a cheaper place to rent). Delaying the inevitable isn’t a good idea for lenders either, so mailing in the keys is good all round.

    That’s the situation I’m currently in. We got qualified for a loan that we shouldn’t have been qualified for. I’ve spent the last 2 years struggling to make ends meet. I’ve been paying for a bad decision on my part. How long does one have to pay for their mistakes?

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  196. 196
    Jessica says:

    RE: S. Marty Pantz @ 69 – The cell phone contract is a better comparison than you give it credit for being. You also didn’t receive a place to live for the balance of your mortgage or the ownership of the house at the end of the day if you walk away from your mortgage.

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  197. 197
    Adam says:

    By drshort @ 61:

    By Drone @ 57:
    Pouring money into a hole for decades will have a real, measurable impact on your family/children. I think the argument can be made that in some cases, NOT defaulting is equivalent to NOT taking care of family. So walking away becomes the only truly moral/ethical choice.

    Couldn’t the same be said for paying your taxes? Couldn’t you provide better for your family if you stopped paying them. Would that make it ethical or moral?

    Paying your taxes contributes to society and others, including your family; e.g. roads, schools, etc…

    Paying your mortgage, in the situation described, doesn’t.

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  198. 198
    Adam says:

    By Kary L. Krismer @ 95:

    Notes typically say “I promise to pay . . ..” How is it possibly ethical to intentionally break a promise that you have the ability to perform?

    Not everyone who made the “promise” still has the ability to perform. If I had the ability to pay, I would. If circumstances outside of my control made me inable to pay…what do I do then? Let my family starve so that the banks get paid?

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  199. 199
    Sniglet says:

    the mortgage contract does not state you only promise to pay. The mortgage contract, which is actually called a trust deed or a deed of trust and note says you promise to repay OR…I REPEAT.. OR you give up the collateral.

    That means regardless of what you do. Pay or walk…you are fulfilling the contract.

    It seems as if my comparison of a home loan to a loan at a pawn shop was accurate after all. Just as there is nothing “unethical” with failing to repay a loan at a pawn shop (allowing the store to sell the item you used for collateral), there is nothing wrong with defaulting on a home loan and allowing the lender to take the house.

    It’s not the borrower’s fault if the lender leant more than the value of the asset pledged as collateral.

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  200. 200
    Lars says:

    Ethics are only one part of the decision equation. Anyone who is claiming otherwise, that she is basing all her decision solely and absolutely on ethics, is clearly delusional. For instance there are situations where all decisions are unethical. If you see a man drowning, would you steal a boat to rescue him? In every situation you have to weigh the ethical implications of an action against the possible outcomes. This is not moral bankruptcy, and not a sign of modern times. It’s simply reality, and it’s been going on for millennia. Read a few old Greek tragedies for some examples.

    So, would you have your kids eat nothing but rice and beans for a decade just to fulfill your contractual mortgage obligations? What about the money you can’t spend in your neighborhood because all your disposable income goes to the borrower?

    Currently, the government is trying to do everything to keep people in their overpriced homes. Personally, I feel it’s wrong to use “my” tax dollars to subsidize mortgages so that owners have lower payments on their inflated loans. Home prices have to come down to a level where they are in proportion to incomes. It makes sense to mitigate this so that it’s a soft landing instead of a crash, but artificially propping up home prices only helps the banks. In my opinion, strategic defaults are steps in the right direction. We need to let the air out of the bubble.

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  201. 201
    DrShort says:

    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.

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  202. 202
    DrShort says:

    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.

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  203. 203
    Sci Ry says:

    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.

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  204. 204
    ME says:

    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.

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  205. 205
    Lars says:

    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.

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  206. 206
    ME says:

    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.

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  207. 207
    Lars says:

    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.

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  208. 208
    Tom says:

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

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  209. 209
    DrShort says:

    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.

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  210. 210
    Sniglet says:

    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.

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  211. 211
    DrShort says:

    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?

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  212. 212
    Jonness says:

    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.

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  213. 213
    Nelson says:

    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.

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  214. 214
    Naive Spotter says:

    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.

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  215. 215
    exconsumer says:

    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’.

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  216. 216
    Sci Ry says:

    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.

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  217. 217
    Tasser says:

    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.

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  218. 218
    Andre says:

    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.

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  219. 219
    Brady says:

    DrShort has won this argument.

    Rate this comment: Thumb up 0

  220. 220

    […] 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 […]

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  221. 221

    […] 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 […]

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