I see walking away as follows: It is the equivalent of letting the pawn shop keep your watch. It is the pawn shop's responsibility if, by the time they put the watch up for sale, it is worth less than the loan they gave you.
Sure, you can cut your losses on a bad investment, but you are still obligated to pay those losses. In many circumstances, they can come after you for the difference in court. And in many circumstances they would be justified in doing so, though it might not be in their best interest due to legal fees and the chances of recovery of substantial assets.
I checked my mortgage, and it says "I promise to pay X with interest to the Lender." So ethically, you are breaking a promise if you walk away, especially so if you have the means at your disposal to keep that promise.
No you are not unethical, and I'll tell you why. That contract is invalid. If you live in WA, it's a non-recourse state. The state law makes it very clear that the bank may either receive your money for 30 odd years, or the house in lieu of that money.
Your lender has slipped that in there to make it seem like an ethical issue when it is not. I think them inserting that verbage is the truly unethical thing.
Sure, you can cut your losses on a bad investment, but you are still obligated to pay those losses. In many circumstances, they can come after you for the difference in court. And in many circumstances they would be justified in doing so, though it might not be in their best interest due to legal fees and the chances of recovery of substantial assets.
This really does depend on the wording of the contract, and the laws of the state you are in. I do know that people have walked away from earnest money and the seller simply takes it and re-lists. It is totally moral because it is understood from the git-go that the buyer is puting down good faith money to follow through and, if he doesn't, gladly lets the seller have the money. We'll, "gladly" may be an exageration, but you get my drift. And if, between the time the earnest money was put down, and the buyer backs out, the price of the home plummets, the seller cannot sue for performance. The forfieture of the earnest money is a completely moral "plan B"
Because of the way home loans are constructed, If houses continue to go up in price and someone walks away from a loan, the lender can resell for an actual profit - or they can lose if prices go down. But I do see, with a secured home loan, the "walk away" scenario as the moral equivalent of giving up an eanest money. And if the "homeowner" was upside down, I just see that as poor planning on the part of the lender.
On a side note, someone else on this thread compared it to a person that gets fired for stealing at work. That does not work because you can go to jail for stealing. It is illegal. It is not analogous to walking away.
And I may have already said this, but many people who CAN make their payments are walking away, avoiding throwing good money after bad.
I checked my mortgage, and it says "I promise to pay X with interest to the Lender." So ethically, you are breaking a promise if you walk away, especially so if you have the means at your disposal to keep that promise.
No you are not unethical, and I'll tell you why. That contract is invalid. If you live in WA, it's a non-recourse state. The state law makes it very clear that the bank may either receive your money for 30 odd years, or the house in lieu of that money.
Your lender has slipped that in there to make it seem like an ethical issue when it is not. I think them inserting that verbage is the truly unethical thing.
The word "promise" means nothing to me. I prefer the advise in the Bible: "let your yes be yes, and your no be no". If you have to promise, it implies that if you don't promise, you don't really mean it. I replace the word "promise" with the word "agree" (in my mind). Then, in a non-recourse state, it becomes clear. I asgree to make the payments, or give the house back. And the choice is totally mine. Both decisions are completely ethical.
Our society depends on people doing what they agree to do. If signing every page of a 10 page document that begins "I promise" means it is nothing but an agreement of conditions, then the rules will change accordingly. Interest rates will rise if lenders know that borrowers will walk at the first opportunity. People won't have the option of getting a mortgage for less than 20% down, because it is only good faith that makes a low down payment mortgage make sense.
Why do you think traditional home loans were almost always 20% down? It creates a large incentive for the "homeowner" to pay back the loan since he's already vested in its ownership. Walking away means losing a LOT of money. Giving someone a 0% down loan takes away any economic benefit of making their payments.
Why do you think traditional home loans were almost always 20% down? It creates a large incentive for the "homeowner" to pay back the loan since he's already vested in its ownership. Walking away means losing a LOT of money. Giving someone a 0% down loan takes away any economic benefit of making their payments.
There's another very good reason for 20% down. That's how much the bank usually had to discount the property to sell it in foreclosure. Buy a $100k home with $20k down, and walk away the next month. The bank should still be able to get the other $80k out of the house, with some losses to perform the transaction.
Of course, in a declining market even if the bank received 20% down they would still reap large losses.
You can make all the analogies you want, but the simple fact is that if you are in a recourse state or if you have refinanced, they can come after any and all assets you have if you walk away.
It has nothing to do with morality, in my mind. They'll just take take your money and stuff, and they'll do it legally. You promised to pay them back, and when you don't, they can take anything you have to make themselves whole.
It doesn't mean they will, but they are perfectly within the law to do so.
If you are in a non-recourse state and you haven't refinanced, it gets murkier.
. I prefer the advise in the Bible: "let your yes be yes, and your no be no". If you have to promise, it implies that if you don't promise, you don't really mean it. I replace the word "promise" with the word "agree" (in my mind).
If you say one thing with your lips and replace it with something else in your mind, then have let your yes become maybe. More powerful to me are the parables that say that if you can't be trusted with a little, then you can't be trusted with a lot.
If you are in a non-recourse state and you haven't refinanced, it gets murkier.
I expect that non-recourse states will change their laws. As it stands now, people with modern ethics are taking advantage of the low interest rates provided by the lending market because at one time people stood by their word. Since the word "promise" apparently meanings nothing to people now, the law will have to provide greater legal consequences for failing to repay. Perhaps even the limitation of seven years of bad credit will be extended if there is no other way to get people to repay their loans. Failing that, even conscientious borrowers will not be able to borrow to buy a house, and that means people will only be able to buy much smaller houses.
. I prefer the advise in the Bible: "let your yes be yes, and your no be no". If you have to promise, it implies that if you don't promise, you don't really mean it. I replace the word "promise" with the word "agree" (in my mind).
If you say one thing with your lips and replace it with something else in your mind, then have let your yes become maybe. More powerful to me are the parables that say that if you can't be trusted with a little, then you can't be trusted with a lot.
If you are in a non-recourse state and you haven't refinanced, it gets murkier.
I expect that non-recourse states will change their laws. As it stands now, people with modern ethics are taking advantage of the low interest rates provided by the lending market because at one time people stood by their word. Since the word "promise" apparently meanings nothing to people now, the law will have to provide greater legal consequences for failing to repay. Perhaps even the limitation of seven years of bad credit will be extended if there is no other way to get people to repay their loans. Failing that, even conscientious borrowers will not be able to borrow to buy a house, and that means people will only be able to buy much smaller houses.
If the word "promise" is written in a contract, I have not said it with my lips. Also, the meaning of words in contracts is very precise, which is why they are so thick. In fact, the paperwork for the sale of a new home can be over 2 inches thick. I've never actually met a person who read it all. Not one. Not one word in a contract has an ethical meaning. They all have legal meanings. A contract is not an "ethics" document. That is why it is in writing.
Now a Handshake is different. It depends on ethics INSTEAD OF a contract.
"Contract" and "ethics" are mutually exclusive. Contracts are very useful when two people from different "ethics" backgrounds wish to enter into an agreement.
You can make all the analogies you want, but the simple fact is that if you are in a recourse state or if you have refinanced, they can come after any and all assets you have if you walk away.
It has nothing to do with morality, in my mind. They'll just take take your money and stuff, and they'll do it legally. You promised to pay them back, and when you don't, they can take anything you have to make themselves whole.
It doesn't mean they will, but they are perfectly within the law to do so.
If you are in a non-recourse state and you haven't refinanced, it gets murkier.
Actually, I believe (and admit I could be wrong) it isn't murky at all. As you said, in a recourse state they can take anything to make themselves whole. But in a non-recourse state, they can't. You can walk away at any time and they get what they agreed to when the contract was signed: They get their collateral back. Like a pawn shop.
However, I do believe people who trash a home before they leave should be prosecuted for vandalism in the amount they did.
I expect that non-recourse states will change their laws. As it stands now, people with modern ethics are taking advantage of the low interest rates provided by the lending market because at one time people stood by their word. Since the word "promise" apparently meanings nothing to people now, the law will have to provide greater legal consequences for failing to repay. Perhaps even the limitation of seven years of bad credit will be extended if there is no other way to get people to repay their loans. Failing that, even conscientious borrowers will not be able to borrow to buy a house, and that means people will only be able to buy much smaller houses.
Jon, I think you are quite confused by the role morals/ethics actually play in business transactions. The "my word is my bond" business tact worked exceptionally well throughout history because most business associations were repeated many times. I go get horseshoes from the blacksmith and tell him I'll pay in October when my harvest comes in. If I don't pay even once, he knows I can't be trusted and will never work with me again. Now I've paid a huge price, because I have to go find a blacksmith who doesn't know my bad name.
The world is fundamentally different now. There are so many corporations competing for your money that you have no way to base business transactions on ethics anymore. It's simply not tenable because you cannot enforce a breach of agreement. Instead, we use contracts and law because you can enforce a breach of contract.
Also, I don't see this as consumers cheating their ever trusting corporations one bit. Business figured out the world changed a lot faster than most people seem to have. It was only natural that the average Joe would figure out that if his bank can screw him with fees but it's ok because it's just business, well then he can also make purely business decisions.
It's murky for a number of reasons. I agree that if you are in a strictly non-recourse state (some are hybrids) and have a purchase loan that you told the truth on, then you can probably walk away without too much concern for anything but a trashed credit rating.
But if you lied on your loan, even in a minor way, then they can wipe you out with a good lawyer.
If you refinanced, often those contracts give them recourse to pursue your other assets.
Same with a HELOC or 2nd.
Again, I'm not an expert on this, and I could be wrong on the details, but I just wanted to get it out there that you might be well served to visit a good RE lawyer before mailing in your keys, particularly if you have significant assets which might make it worth it to the lenders to nail you to wall upside-down and shake your pockets.
It's murky for a number of reasons. I agree that if you are in a strictly non-recourse state (some are hybrids) and have a purchase loan that you told the truth on, then you can probably walk away without too much concern for anything but a trashed credit rating.
But if you lied on your loan, even in a minor way, then they can wipe you out with a good lawyer.
If you refinanced, often those contracts give them recourse to pursue your other assets.
Same with a HELOC or 2nd.
Again, I'm not an expert on this, and I could be wrong on the details, but I just wanted to get it out there that you might be well served to visit a good RE lawyer before mailing in your keys, particularly if you have significant assets which might make it worth it to the lenders to nail you to wall upside-down and shake your pockets.
I am a binary thinker. A non-recourse loan, and the concept of lying on a document are two completely different things and have different repercussions, as you said. Likewise, with a refinance that has recourse. It is by definition a loan with recourse and would not be considered in a discussion about non-recourse loans.
I agree that before I were to mail in keys, I would consult an attourney (or simply read my contract and find out about my state' laws regarding recourse for ALL types of loans).
But determining legal ramifications of walking away is easily nailed down for any specific situation.
The REAL issue for me here is the discussion about the morality of walking away. It is much more squishy. And to give it context, I firmly believe that what is legal is not necessarily moral and what is moral is not necessarily legal. Hiding Jews in your apartment in Berlin in 1943 would be an example of the latter..
...but I just wanted to get it out there that you might be well served to visit a good RE lawyer before mailing in your keys, particularly if you have significant assets which might make it worth it to the lenders to nail you to wall upside-down and shake your pockets.
I agree. For me this is all academic though. I rent, and the decision to do so was quite conscious. This thing collapsed two years later than I thought it would.
If I had to state an opinion on the ethics of it, I would probably lean toward thinking if I borrowed money, It would be unethical to not make some attempt to pay it back.
I know they are big companies, and big companies do many many unethical things in their daily search for profit, but I have a conscience and like to think I pay my debts.
. I prefer the advise in the Bible: "let your yes be yes, and your no be no". If you have to promise, it implies that if you don't promise, you don't really mean it. I replace the word "promise" with the word "agree" (in my mind).
If you say one thing with your lips and replace it with something else in your mind, then have let your yes become maybe. More powerful to me are the parables that say that if you can't be trusted with a little, then you can't be trusted with a lot.
Jon,
You seem to be thinking that these people were intending to walk away from their house and mortgage when they signed the documents. As if they made the contract (or "promise") fully intending from the beginning to walk away and leave the lender with big losses. And you consider this to be "unethical" to plan this course of action from the beginning.
I doubt that is the case for anyone. Nobody was planning in advance for the property value of their home to fall. It hasn't really happened anywhere (with some regional exceptions) since WW2. So nobody was planning for the current financial scenarios that are happening.
So is it unethical for somebody to change their strategy based on circumstances that were not anticipated? The people walking away from their underwater mortgages were not planning for the values to fall by 20%. If they saw that happening in advance, they likely would have rented instead.
This is not an ethics issue of breaking a "promise". This is simply people adapting to unfortunate circumstances. And they are doing it completely within their contractual obligations. If they don't pay, the bank takes the property back via foreclosure.
Suppose your parents lent you the cash to buy a house 100%, and per IRS regulations wrote that up in a document where you promise to repay, so that it is not taxed as a gift. The house price drops and you walk away. Is that ethical? How about the lender is a small bank and George Bailey is the loan officer, and your neighbors are the depositors? But somehow the lenders have become disembodied and now it is ok to borrow money and not repay it, simply because there is now a big stack of paperwork to be signed, which is there to try and anticipate all the myriad of excuses that people have used in the past.
"It's simply not tenable because you cannot enforce a breach of agreement. Instead, we use contracts and law because you can enforce a breach of contract."
A contract means an agreement. A written contract is one where a piece of paper proves that there is an agreement. By law, RE is a special case where verbal contracts are not enforceable, but in most cases other sufficient evidence of an agreement is enough to prevail in a lawsuit.
If I had to state an opinion on the ethics of it, I would probably lean toward thinking if I borrowed money, It would be unethical to not make some attempt to pay it back.
That is how I feel too. But that is just a generalization. If I found out I had been suckered into something and the law protects me (through being able to walk away), I'll think of it as "protection" from being swindled.
But that is a generalization as well. Since it must be on a case by case basis and I rent, I can't go further without creating complex hypotheticals, which would be silly.
I doubt that is the case for anyone. Nobody was planning in advance for the property value of their home to fall. It hasn't really happened anywhere (with some regional exceptions) since WW2. So nobody was planning for the current financial scenarios that are happening.
You might want to read this blog that tracks many instances of outright fraud by people who bought houses with no intensions of ever paying first month's mortgage. The site mainly focuses on the southern California market, and shows what happens when lending standards are not enforced and you let anyone with a heartbeat qualify for a mortgage. Search for Super Jenae
I doubt that is the case for anyone. Nobody was planning in advance for the property value of their home to fall. It hasn't really happened anywhere (with some regional exceptions) since WW2. So nobody was planning for the current financial scenarios that are happening.
You might want to read this blog that tracks many instances of outright fraud by people who bought houses with no intensions of ever paying first month's mortgage. The site mainly focuses on the southern California market, and shows what happens when lending standards are not enforced and you let anyone qualify anyone with a heartbeat for a mortgage. Search for Super Jenae
Yeah - it's amazing the detail they sometimes get into, regarding these deals.
I'm afraid to click the link, because last time I visited a few months ago I lost an entire day!
I wish we had a team that did this here. I figure you must need someone with access to the mls teaming up with someone at an escrow company with access to Deeds of Trust to get the level of detail needed.
It would be great to get some great examples to counter the "...culture of honesty..." Malarkey spewed around here, when it's just that the tide hasn't receded enough to see the amount of fraud all around us.
Suppose your parents lent you the cash to buy a house 100%, and per IRS regulations wrote that up in a document where you promise to repay, so that it is not taxed as a gift. The house price drops and you walk away. Is that ethical? How about the lender is a small bank and George Bailey is the loan officer, and your neighbors are the depositors? But somehow the lenders have become disembodied and now it is ok to borrow money and not repay it, simply because there is now a big stack of paperwork to be signed, which is there to try and anticipate all the myriad of excuses that people have used in the past.
You are confusing the issue entirely. The bank makes a business decision to loan, and the buyer makes a business decision to borrow. In the case of housing, the loan is guaranteed against loss by the asset.
So long as the bank took due diligence when making the loan, deed in lieu should make them whole. A lot of banks didn't do that in the last 5 years. If they had, prices wouldn't have skyrocketed and individuals wouldn't have been enticed to overpay. It is the lenders faults that they hold a number of mortgages which will not make them whole in a declining market. That the market is declining so much is a lot of peoples faults, but in many cases the bank wouldn't have been whole if the market simply stayed flat.
Now, back to your original question. If I borrowed 100% from my parents to buy a house, and agreed to make monthly payment $X or I can stop at any time and give them the home (essentially, this is a lease with option to buy) then under certain circumstances I would not feel morally obliged to stay in that house until it was paid off. In non-recourse states, this is exactly the terms lenders agreed to, regardless of how they wrote the contract.
That "culture of honesty" claptrap (linked above) was hilarious, but I think I need a shower now. I was reminded of a guy I used to date who called himself, unironically, "a natural athlete." There are just some self-descriptive claims that both are gross on their face and should instantly raise suspicion on the part of the described-to. I have so much respect for those in RE, like Jillayne in this instance, who keep on sticking to their guns and refuse to participate in the pep rally.
I would not feel morally obliged to stay in that house until it was paid off. In non-recourse states, this is exactly the terms lenders agreed to, regardless of how they wrote the contract.
If it was truly a lease with option to buy, then why do they report you as a bad credit risk for 7 years if you are merely exercising your rights under the contract?
...honor is a harder master than the law. It cannot compromise for less than 100 cents on the dollar and its debts never outlaw.
- Mark Twain, a Biography
If it was truly a lease with option to buy, then why do they report you as a bad credit risk for 7 years if you are merely exercising your rights under the contract?
...honor is a harder master than the law. It cannot compromise for less than 100 cents on the dollar and its debts never outlaw.
- Mark Twain, a Biography
Very nice Twain quote. I'm not a huge fan of his books, but he has some excellent remarks.
Regarding your question, credit scores are numbers designed to optimize lender's profits not evaluate your trustworthiness. Thus, any borrower behavior which might reduce a lenders profits may lower one of your credit scores (according to vantage score, there are thousands to choose from). Also, you can do responsible things which lower some of those scores. Closing out an account also lowers your FICO score. Also, other less known credit scores punish borrows who carry no balance.
Based on this line of reasoning, you can't argue that it is unethical to close a credit card account or pay your balance in full every month.
I do have a question for you Jon. You seem extremely agitated about this question. How much of your skin is on the line? Do you anticipate that a culture of "Walking Away" will hurt your bottom line, or are you just a citizen concerned by the moral decline of our civilization?
How much of your skin is on the line? Do you anticipate that a culture of "Walking Away" will hurt your bottom line, or are you just a citizen concerned by the moral decline of our civilization?
My apologies if my remarks seem harsh, they are not intended to be. I am very grateful that my circumstances allow me the luxury of not having to personally face this temptation. I have quite a bit of equity in my house, but none specifically in the banking industry.
I once ran unsuccessfully for public office, and that process made me quite conscious of how positions that one group favors work to the disadvantage of other people. In this case, walking away not only takes money directly out of the pocket of the lender, but it then causes lenders to raise rates for new borrowers. That means that for the same cost people will live in smaller houses, there is less money for construction workers, factories, and all down the line. The idea of a 7 year limit on bad credit comes from the idea of giving people a second chance after even the worst decision. I expect it originated in the Biblical law to release slaves after 7 years. That could be changed if loans are no longer available because people aren't repaying them. Non-recourse states could change that law, thus putting families at greater risk for market changes outside their control.
There is also the broader and more subtle cost of the lost idea of a promise and the value of peoples' word. That could make day to day life that much more difficult if people are always trying to take advantage of one another. If people ignore the part where it says "I promise," and only abide by the laws describing breach of contract, the next group will ignore the laws altogether. There aren't enough police and investigators to keep on top of things now. If people have less regard for promises, the cost of litigation, enforcement, and the inevitable resulting corruption, abuse, and incorrect judgments will increase.
I don't really have a problem with people bailing when they have no alternative. Bankruptcy is there to give people a second chance. But people just walking away from a loan they had the privilege of receiving and leaving the bank with a house it doesn't need, like it is their right, just bothers me.
There is also the broader and more subtle cost of the lost idea of a promise and the value of peoples' word. That could make day to day life that much more difficult if people are always trying to take advantage of one another. If people ignore the part where it says "I promise," and only abide by the laws describing breach of contract, the next group will ignore the laws altogether. There aren't enough police and investigators to keep on top of things now. If people have less regard for promises, the cost of litigation, enforcement, and the inevitable resulting corruption, abuse, and incorrect judgments will increase.
Yes. You are correct. Just look around and you can see we are quickly approaching this point. Leagalism is a failed philosophy. Most folks just haven't realized it yet.
Comments
Sure, you can cut your losses on a bad investment, but you are still obligated to pay those losses. In many circumstances, they can come after you for the difference in court. And in many circumstances they would be justified in doing so, though it might not be in their best interest due to legal fees and the chances of recovery of substantial assets.
No you are not unethical, and I'll tell you why. That contract is invalid. If you live in WA, it's a non-recourse state. The state law makes it very clear that the bank may either receive your money for 30 odd years, or the house in lieu of that money.
Your lender has slipped that in there to make it seem like an ethical issue when it is not. I think them inserting that verbage is the truly unethical thing.
Because of the way home loans are constructed, If houses continue to go up in price and someone walks away from a loan, the lender can resell for an actual profit - or they can lose if prices go down. But I do see, with a secured home loan, the "walk away" scenario as the moral equivalent of giving up an eanest money. And if the "homeowner" was upside down, I just see that as poor planning on the part of the lender.
On a side note, someone else on this thread compared it to a person that gets fired for stealing at work. That does not work because you can go to jail for stealing. It is illegal. It is not analogous to walking away.
And I may have already said this, but many people who CAN make their payments are walking away, avoiding throwing good money after bad.
The word "promise" means nothing to me. I prefer the advise in the Bible: "let your yes be yes, and your no be no". If you have to promise, it implies that if you don't promise, you don't really mean it. I replace the word "promise" with the word "agree" (in my mind). Then, in a non-recourse state, it becomes clear. I asgree to make the payments, or give the house back. And the choice is totally mine. Both decisions are completely ethical.
Excellent analogy.
Why do you think traditional home loans were almost always 20% down? It creates a large incentive for the "homeowner" to pay back the loan since he's already vested in its ownership. Walking away means losing a LOT of money. Giving someone a 0% down loan takes away any economic benefit of making their payments.
There's another very good reason for 20% down. That's how much the bank usually had to discount the property to sell it in foreclosure. Buy a $100k home with $20k down, and walk away the next month. The bank should still be able to get the other $80k out of the house, with some losses to perform the transaction.
Of course, in a declining market even if the bank received 20% down they would still reap large losses.
It has nothing to do with morality, in my mind. They'll just take take your money and stuff, and they'll do it legally. You promised to pay them back, and when you don't, they can take anything you have to make themselves whole.
It doesn't mean they will, but they are perfectly within the law to do so.
If you are in a non-recourse state and you haven't refinanced, it gets murkier.
If you say one thing with your lips and replace it with something else in your mind, then have let your yes become maybe. More powerful to me are the parables that say that if you can't be trusted with a little, then you can't be trusted with a lot.
I expect that non-recourse states will change their laws. As it stands now, people with modern ethics are taking advantage of the low interest rates provided by the lending market because at one time people stood by their word. Since the word "promise" apparently meanings nothing to people now, the law will have to provide greater legal consequences for failing to repay. Perhaps even the limitation of seven years of bad credit will be extended if there is no other way to get people to repay their loans. Failing that, even conscientious borrowers will not be able to borrow to buy a house, and that means people will only be able to buy much smaller houses.
Now a Handshake is different. It depends on ethics INSTEAD OF a contract.
"Contract" and "ethics" are mutually exclusive. Contracts are very useful when two people from different "ethics" backgrounds wish to enter into an agreement.
Actually, I believe (and admit I could be wrong) it isn't murky at all. As you said, in a recourse state they can take anything to make themselves whole. But in a non-recourse state, they can't. You can walk away at any time and they get what they agreed to when the contract was signed: They get their collateral back. Like a pawn shop.
However, I do believe people who trash a home before they leave should be prosecuted for vandalism in the amount they did.
Sometimes the opportunity for a windfall gain can causes people's judgment to become clouded.
Did you know that the word testament means contract, and so the New and Old Testaments are written contracts between God and man?
Jon, I think you are quite confused by the role morals/ethics actually play in business transactions. The "my word is my bond" business tact worked exceptionally well throughout history because most business associations were repeated many times. I go get horseshoes from the blacksmith and tell him I'll pay in October when my harvest comes in. If I don't pay even once, he knows I can't be trusted and will never work with me again. Now I've paid a huge price, because I have to go find a blacksmith who doesn't know my bad name.
The world is fundamentally different now. There are so many corporations competing for your money that you have no way to base business transactions on ethics anymore. It's simply not tenable because you cannot enforce a breach of agreement. Instead, we use contracts and law because you can enforce a breach of contract.
Also, I don't see this as consumers cheating their ever trusting corporations one bit. Business figured out the world changed a lot faster than most people seem to have. It was only natural that the average Joe would figure out that if his bank can screw him with fees but it's ok because it's just business, well then he can also make purely business decisions.
But if you lied on your loan, even in a minor way, then they can wipe you out with a good lawyer.
If you refinanced, often those contracts give them recourse to pursue your other assets.
Same with a HELOC or 2nd.
Again, I'm not an expert on this, and I could be wrong on the details, but I just wanted to get it out there that you might be well served to visit a good RE lawyer before mailing in your keys, particularly if you have significant assets which might make it worth it to the lenders to nail you to wall upside-down and shake your pockets.
I agree that before I were to mail in keys, I would consult an attourney (or simply read my contract and find out about my state' laws regarding recourse for ALL types of loans).
But determining legal ramifications of walking away is easily nailed down for any specific situation.
The REAL issue for me here is the discussion about the morality of walking away. It is much more squishy. And to give it context, I firmly believe that what is legal is not necessarily moral and what is moral is not necessarily legal. Hiding Jews in your apartment in Berlin in 1943 would be an example of the latter..
I know they are big companies, and big companies do many many unethical things in their daily search for profit, but I have a conscience and like to think I pay my debts.
Jon,
You seem to be thinking that these people were intending to walk away from their house and mortgage when they signed the documents. As if they made the contract (or "promise") fully intending from the beginning to walk away and leave the lender with big losses. And you consider this to be "unethical" to plan this course of action from the beginning.
I doubt that is the case for anyone. Nobody was planning in advance for the property value of their home to fall. It hasn't really happened anywhere (with some regional exceptions) since WW2. So nobody was planning for the current financial scenarios that are happening.
So is it unethical for somebody to change their strategy based on circumstances that were not anticipated? The people walking away from their underwater mortgages were not planning for the values to fall by 20%. If they saw that happening in advance, they likely would have rented instead.
This is not an ethics issue of breaking a "promise". This is simply people adapting to unfortunate circumstances. And they are doing it completely within their contractual obligations. If they don't pay, the bank takes the property back via foreclosure.
Try telling that to Pennzoil: http://www.bizjournals.com/houston/stor ... tory2.html
A contract means an agreement. A written contract is one where a piece of paper proves that there is an agreement. By law, RE is a special case where verbal contracts are not enforceable, but in most cases other sufficient evidence of an agreement is enough to prevail in a lawsuit.
But that is a generalization as well. Since it must be on a case by case basis and I rent, I can't go further without creating complex hypotheticals, which would be silly.
You might want to read this blog that tracks many instances of outright fraud by people who bought houses with no intensions of ever paying first month's mortgage. The site mainly focuses on the southern California market, and shows what happens when lending standards are not enforced and you let anyone with a heartbeat qualify for a mortgage. Search for Super Jenae
http://bubbletracking.blogspot.com/
I'm afraid to click the link, because last time I visited a few months ago I lost an entire day!
I wish we had a team that did this here. I figure you must need someone with access to the mls teaming up with someone at an escrow company with access to Deeds of Trust to get the level of detail needed.
It would be great to get some great examples to counter the "...culture of honesty..." Malarkey spewed around here, when it's just that the tide hasn't receded enough to see the amount of fraud all around us.
You are confusing the issue entirely. The bank makes a business decision to loan, and the buyer makes a business decision to borrow. In the case of housing, the loan is guaranteed against loss by the asset.
So long as the bank took due diligence when making the loan, deed in lieu should make them whole. A lot of banks didn't do that in the last 5 years. If they had, prices wouldn't have skyrocketed and individuals wouldn't have been enticed to overpay. It is the lenders faults that they hold a number of mortgages which will not make them whole in a declining market. That the market is declining so much is a lot of peoples faults, but in many cases the bank wouldn't have been whole if the market simply stayed flat.
Now, back to your original question. If I borrowed 100% from my parents to buy a house, and agreed to make monthly payment $X or I can stop at any time and give them the home (essentially, this is a lease with option to buy) then under certain circumstances I would not feel morally obliged to stay in that house until it was paid off. In non-recourse states, this is exactly the terms lenders agreed to, regardless of how they wrote the contract.
If it was truly a lease with option to buy, then why do they report you as a bad credit risk for 7 years if you are merely exercising your rights under the contract?
...honor is a harder master than the law. It cannot compromise for less than 100 cents on the dollar and its debts never outlaw.
- Mark Twain, a Biography
Very nice Twain quote. I'm not a huge fan of his books, but he has some excellent remarks.
Regarding your question, credit scores are numbers designed to optimize lender's profits not evaluate your trustworthiness. Thus, any borrower behavior which might reduce a lenders profits may lower one of your credit scores (according to vantage score, there are thousands to choose from). Also, you can do responsible things which lower some of those scores. Closing out an account also lowers your FICO score. Also, other less known credit scores punish borrows who carry no balance.
Based on this line of reasoning, you can't argue that it is unethical to close a credit card account or pay your balance in full every month.
I do have a question for you Jon. You seem extremely agitated about this question. How much of your skin is on the line? Do you anticipate that a culture of "Walking Away" will hurt your bottom line, or are you just a citizen concerned by the moral decline of our civilization?
My apologies if my remarks seem harsh, they are not intended to be. I am very grateful that my circumstances allow me the luxury of not having to personally face this temptation. I have quite a bit of equity in my house, but none specifically in the banking industry.
I once ran unsuccessfully for public office, and that process made me quite conscious of how positions that one group favors work to the disadvantage of other people. In this case, walking away not only takes money directly out of the pocket of the lender, but it then causes lenders to raise rates for new borrowers. That means that for the same cost people will live in smaller houses, there is less money for construction workers, factories, and all down the line. The idea of a 7 year limit on bad credit comes from the idea of giving people a second chance after even the worst decision. I expect it originated in the Biblical law to release slaves after 7 years. That could be changed if loans are no longer available because people aren't repaying them. Non-recourse states could change that law, thus putting families at greater risk for market changes outside their control.
There is also the broader and more subtle cost of the lost idea of a promise and the value of peoples' word. That could make day to day life that much more difficult if people are always trying to take advantage of one another. If people ignore the part where it says "I promise," and only abide by the laws describing breach of contract, the next group will ignore the laws altogether. There aren't enough police and investigators to keep on top of things now. If people have less regard for promises, the cost of litigation, enforcement, and the inevitable resulting corruption, abuse, and incorrect judgments will increase.
I don't really have a problem with people bailing when they have no alternative. Bankruptcy is there to give people a second chance. But people just walking away from a loan they had the privilege of receiving and leaving the bank with a house it doesn't need, like it is their right, just bothers me.
Yes. You are correct. Just look around and you can see we are quickly approaching this point. Leagalism is a failed philosophy. Most folks just haven't realized it yet.