I admit that my statement yesterday that “ethics and morals should not even enter the conversation” was a bit of intentional editorial hyperbole intended to spur the discussion. Obviously it does make sense to have a conversation about the ethics of walking away, since that’s exactly what we did for 177 comments (so far).
As is often the case, I find that I am learning the most from the people that disagree with me and present their opinions in a well-thought-out, rational manner. Specifically, the best argument that I read in yesterday’s discussion that makes the case for walking away being an unethical choice is that when you sign a mortgage contract, it is assumed that both parties are “acting in good faith,” and have an obligation to do so for the entire term of the contract.
While there are definitely buyers out there who were not acting in good faith from the beginning, I believe that most people probably were. I’m not sold on the idea that when circumstances dramatically change and continuing to make payments no longer makes sense, deciding to walk away means you are no longer acting in good faith, but let’s set the buyer’s position aside for a moment.
A rather detailed story popped up on ABC News yesterday that I think has some bearing on this discussion. Here is an excerpt from Mortgage Meltdown: 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.
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.
In interviews and in court records, 10 former fraud investigators at seven of the nation’s biggest banks and lenders—including Wells Fargo (WFC), IndyMac Bank, and Countrywide Financial—describe corporate cultures that allowed fraud to thrive in the pursuit of loan volume and market share.
Were the banks acting in good faith during the housing bubble when they handed out mortgages to anyone and everyone, regardless of qualifications? If the systemic problems described in this article are accurate, doesn’t that indicate that the banks were the ones not acting in good faith when the mortgage was written?
Consider this hypothetical. It is the summer of 2006 and you are a naïve first-time homebuyer. You have watched home prices skyrocket over the last few years and are genuinely concerned that if you don’t buy a home soon, you will be priced out forever. You go to your bank, get pre-qualified for a loan, and buy your first home. None of your paperwork was falsified, and you got a loan you can afford that you have every intention of paying back.
However, unbeknownst to you, the bank couldn’t have cared less about whether you could really afford the loan payments or if you intended to pay. All they cared about was originating the loan so they could collect the fee before repackaging and selling your loan into the secondary market.
I am not claiming that this scenario describes 100% of loan transactions during the housing bubble, but as the above-linked article demonstrates, it was certainly not uncommon.
So here is my question for the readers making the “good faith” argument. If you were acting in good faith when you obtained your mortgage, but the bank was not, are you ethically bound to continue making payments even if it makes no financial sense to continue doing so? I contend that the answer is no.