Is it wrong to walk away from your mortgage?

[Little Raven]

Lots of people are finding themselves in foreclosure, and most experts predict there will be a whole lot more of them before things improve. In fact, the whole landscape is shifting. Foreclosure used to be the financial last stand...something that was to be avoided at all costs, as it meant both a loss of equity and an indelible mark on your credit. But now we have massive numbers of home owners with little or no equity who are finding themselves upside down on their house. For many of these people, it just plain makes financial sense to walk away. Sure, you still take a credit hit, but those just don’t sting as badly as they used to...odds are in a few years (at most) you’ll find someone who’s willing to lend you money again. Plus, it’s becoming so common, how much of a stigma can there really be?

In fact, it’s becoming common enough that there are now service industries springing up to help you walk away from your house as painlessly as possible. I confess I’m not quite sure why I would pay someone a thousand dollars when the bank will happily foreclose on me for free, but presumably they make the process less painful.

However, I’ve noticed that some people view it as some kind of moral fault to walk away from a mortgage and that people that do so need to be punished in some fashion, presumably by more than a bad credit score. (The whole you agreed to these terms, and you should do your best to honor them, financial responsibility...etc...etc.) I don’t really understand this viewpoint. I understand that a contract was signed, but that contract also had provisions for what happens when the lendee is unable or unwilling to make the payments...the bank gets the house back and put a black mark on the lendee’s credit. If at some point it makes financial sense for an individual to walk away from a mortgage, why shouldn’t they? I realize the bank doesn’t want the house back, but I fail to see how that’s the lendee’s problem. Presumably, the bank factored in the risk of lending money to the person in question and set the interest rates and required down payments accordingly. If the bank miscalculated, well, that’s unfortunate for them, but I don’t see how it’s an individual’s responsibility to insure a bank’s profits.

Is it a moral failing to walk away from a mortgage?

 

[mrt144]

I wouldnt call it a moral failing but rather a perverse shifting of financial incentives.

 

[skadistic]

Morally? No. Ethically, yes.

 

[Little Raven]

How is it an ethical failing? A mortgage is just a contract, and like any contract, it contains terms for how the agreement shall be terminated.

How is it an ethical failure to cancel a contract?

 

[JollyRoger]

Morally? No. Ethically, yes.

What is unethical about it? The contract between the parties deals with that possibility in some detail, so I don't see why moving to those clauses in the contract constitutes some ethical lapse.

 

[skadistic]

Your right not being able to pay for the home you said you would isn't ethically wrong. Failing to fulfill your promised contractual side of the deal is in no way unethical. Nope nothing unethical at all about breaking a contract.

 

[Little Raven]

Nope nothing unethical at all about breaking a contract.

You're not breaking it. A mortgage lays out quite specifically what happens when the bank doesn't get the payments. Assuming you comply with those clauses, where's the breach?

 

[MobBoss]

I think it would be wrong in that if you had the money to make the payments and simply didnt.

But there are other priorities far more important than a house you cant afford. The ethical/moral part comes into play when you enter into a bad financing situation that you know you probably are not going to be able to afford down the road and do it anyway.

 

[nivi]

Who the hell thinks it's morally wrong to break a contract? Thats just plain silly.

 

[skadistic]

You're not breaking it. A mortgage lays out quite specifically what happens when the bank doesn't get the payments. Assuming you comply with those clauses, where's the breach?

Your in breach when you don't pay. You know like you promised you would when you signed the papers. That is a breach of contract. Thats why the house is being foreclosed. Not paying your bills when you have promised to do so is unethical.

 

[mrt144]

Your in breach when you don't pay. You know like you promised you would when you signed the papers. That is a breach of contract. Thats why the house is being foreclosed. Not paying your bills when you have promised to do so is unethical.

i agree with this. simply having the provision of the process of what happens when you dont make payments in a contract doesnt mean that not making payments is allowed for in the contract.

 

[Mark1031]

No it is not. On the other hand it is morally and ethically wrong and should be fraud or criminal negligence for bond rating companies to give AAA ratings to bundles of subprime junk.

 

[Little Raven]

You know like you promised you would when you signed the papers.

The papers that you sign say you will make the payments or else you will be foreclosed on. It's not a blood-oath. You promise to make the payments or else forfeit the house and all your equity.

Assuming that you're willing to forfeit the house and all your equity, it's not a breach of contract. It's a termination of the contract along the terms specified in the contract. There's nothing unethical about that.

 

[Elrohir]

When you get down to it, when you break a contract, you're really breaking a promise you made. If you're fine with that, then OK, I suppose - I just don't think I'd feel comfortable doing that.

I'm not talking about realizing that you can't, in the long run pay the house off. It's common sense to acknowledge that and get out while you can if the only alternative is paying mortgage payments for months or years, and then getting foreclosed on anyway. What I'm talking about are people who think they could pay it off, but aren't willing to do so because they don't think it's in their best interest.

 

[IglooDame]

There are shades of gray. Assuming the mortgage is an ARM or some other non-fixed-monthly-payback type, if the homebuyers were clueless about how screwed they'd be if the house value didn't appreciate and the monthly payments went way up, it is a sort of negligence. Just continuing to make payments until bankruptcy finally arrives with no alternative or other option in sight doesn't seem to really benefit the bank, either - you'd think that the bank would have a vested interest in renegotiating in such a way that the buyers can stay afloat and maintain the mortgage payments. If it is more a case of "predatory lending" then there's virtually no ethical issue at all, other than the bank reaping what it sowed (and I'm happy to be in agreement with Warren Buffett on that one).

 

[skadistic]

The papers that you sign say you will make the payments or else you will be foreclosed on. It's not a blood-oath. You promise to make the payments or else forfeit the house and all your equity.

Assuming that you're willing to forfeit the house and all your equity, it's not a breach of contract. It's a termination of the contract along the terms specified in the contract. There's nothing unethical about that.

Forecloser is the penalty for breach of contract. Its termination set out for what happens when you breach the contract. It says that if you breach the contract you will be foreclosed.

 

[Aegis]

Is it ethical to trick people into signing Balloon, interest-only or (to a lesser degree) Adjustable-rate loans?

If not, then it isn't unethical to walk away from such traps.

 

[skadistic]

Is it ethical to trick people into signing Balloon, interest-only or (to a lesser degree) Adjustable-rate loans?

If not, then it isn't unethical to walk away from such traps.

Its not a trick. Everyone can read the terms they sign. But if you are going to sign your name to the biggest personal perches in your life with out reading and making sure you understand exactly what your signing you deserve what ever happens to you. If you can't keep your promises you are unethical. Either by intent or ignorance.

 

[Methos]

A couple points I'd like to make....

As has been stated previously, a contract was signed and statements (in writing) indicate what happens if you don't fulfill your side of the agreement. No it isn't wrong for the bank to foreclose, it was wrong that you didn't pay your mortgage.

One problem I see is with the real estate agents tactics. Even when you tell your agent you don't wish to spend over $x a month, or $y for the house, they will always push homes that are above your limit. Granted, its your problem you don't force your limit on them, or fire them, but its still a bad tactic IMO. The agent is merely trying to make as much profit as they can off of you.

Another problem I see is that people place trust in their agent, loan officer, and anyone else who fits in the process of buying a home. They need to remember these people aren't here to help you, they are here to profit from you.

Possibly the biggest problem I see in the whole system is that the home buyers don't seem to have a budget set up, or if they do, its either not correct or they are not following it correctly. Because of this the sign a contract for something that is beyond their means, as in to high of a percentage of their take home pay is going to their mortgage. You shouldn't have a mortgage that is more than 30 - 35% of your take home pay.

Our house is very small, a mere 780 square feet. It's our first home and we wanted to go cheaply starting out. Our mortgage payment isn't much and easily affordable for us. I hear people joke about how our mortgage is less than they're car payment. I laugh as I wonder why they're paying so much for their car.

In summary, IMHO it's the borrowers fault they're being foreclosed on.

 

[Little Raven]

When you get down to it, when you break a contract, you're really breaking a promise you made. If you're fine with that, then OK, I suppose - I just don't think I'd feel comfortable doing that.

I don't even get how breaking a contract is breaking a promise.

If I say, 'Elrohir, lend me 10,000 bucks. I promise I'm good for it. You have my word.' and you lend me 10 grand, I'm going to feel a very strong obligation to pay it off. After all, I made a promise. I should honor it.

If I say 'Elrohir, lend me 10,000 bucks. I'm going to buy a car. I'll pay you 5% interest over the course of 7 years, front-loaded. If you call in the loan early, you forfeit all interest. If I miss a payment, I'll give you the car and forfeit all my equity. Sound good?' That's business arrangement. You're going to balance the risk of lending me money vs. the profit you'll make. I'm going to balance the cost of paying you back vs. the cost of not paying you back. We're both going to do what we perceive to be in our financial best interest. If either of us wants out, we'll exit via the terms laid out in the contract. Assuming we stay within those terms, neither of us is breaking promises, right?