Rich more likely to walk away from mortgage(nytimes.com)
nytimes.com
Rich more likely to walk away from mortgage
http://www.nytimes.com/2010/07/09/business/economy/09rich.html?_r=1&hp=&pagewanted=all
10 comments
"Her property is underwater by 300K. Mine is about 250K. Neither of us are wealthy..."
I realize that "wealthy" is a hopelessly vague relative term, but unless your houses are literally worth $0 now to put you $550K underwater, most people would consider you wealthy to have bought them in the first place.
I realize that "wealthy" is a hopelessly vague relative term, but unless your houses are literally worth $0 now to put you $550K underwater, most people would consider you wealthy to have bought them in the first place.
Hello, jdminhbg. It's an interesting point that you make, but here is the real situation with my girlfriend. Do you still think that she is considered wealthy?
- She has been employed as a licensed clinical social worker for 11 years with a county in california. - She owned a condo for 3 years, sold it, made 100K profit. - She used that 100K as a down payment on her current home. - She bought the home for 500K, 400K 30 yr fixed mortgage. - She bought the home 6 years ago. - Today, she owes $370K, and the BPO of the home is 170K. This is commensurate with other homes in the area.
- She has 30K in the bank and a pension plan with the state of California.
She is still employed with the county, but they are pursuing layoffs in social services. Her job is at risk. Technically, she is insolvent, as the 300K owed is greater than the 30K she has in the bank. Her retirement pension doesn't count towards solvency.
So a set of circumstances where she used the profits from one investment, and placed all of those profits in another investment to buy a nicer home for herself has turned sour. Her salary let her afford the 400K mortgage, but she wasn't able to save or invest in other items.
She didn't have tremendous wealth, but she did have skills and a job that would allow her to continue payments against a loan, at the cost of not being able to afford any other investments.
When this is all done, she'll have 40K in the bank from saved mortgage payments, a pension, her job (hopefully), and bad credit.
- She has been employed as a licensed clinical social worker for 11 years with a county in california. - She owned a condo for 3 years, sold it, made 100K profit. - She used that 100K as a down payment on her current home. - She bought the home for 500K, 400K 30 yr fixed mortgage. - She bought the home 6 years ago. - Today, she owes $370K, and the BPO of the home is 170K. This is commensurate with other homes in the area.
- She has 30K in the bank and a pension plan with the state of California.
She is still employed with the county, but they are pursuing layoffs in social services. Her job is at risk. Technically, she is insolvent, as the 300K owed is greater than the 30K she has in the bank. Her retirement pension doesn't count towards solvency.
So a set of circumstances where she used the profits from one investment, and placed all of those profits in another investment to buy a nicer home for herself has turned sour. Her salary let her afford the 400K mortgage, but she wasn't able to save or invest in other items.
She didn't have tremendous wealth, but she did have skills and a job that would allow her to continue payments against a loan, at the cost of not being able to afford any other investments.
When this is all done, she'll have 40K in the bank from saved mortgage payments, a pension, her job (hopefully), and bad credit.
If she can afford payments on a $400k mortgage (around $3k/month or so?), then yes, she is (or was) wealthy by the standards of the vast majority of America.
$400K mortgage at 5 year variable of 1.90% and 25 year amortization is only $1,674 per month.
This is exactly why low interest rates are quite dangerous...
This is exactly why low interest rates are quite dangerous...
Ya, but she is in California. Her costs are much higher and I bet she does not feel wealthy.
An American homeless man making $5/day in change is wealthy compared to much of the world.
An American homeless man making $5/day in change is wealthy compared to much of the world.
She has more liabilities than assets. She may have a high net income, but she's not wealthy.
Unless she was making north of 100k yearly that is an excessive amount of debt to take on. If instead she would have bought a less expensive house she would be in a much better position today.
Her mortgage payments + real estate tax were amounting to 38% of her gross income when she first took the mortgage. Experts and mortgage companies now agree that real estate payments greater than 31.1% should be avoided at all costs.
She's a social worker, not comfortable with finance. She had little desire for other life comforts other than a home. She sat down, realized that she could make the monthly payments, and thought it was safe since the market continuously kept going up.
If someone had been there to tell her that the home purchase was too high given her salary, she would have thought differently.
She's a social worker, not comfortable with finance. She had little desire for other life comforts other than a home. She sat down, realized that she could make the monthly payments, and thought it was safe since the market continuously kept going up.
If someone had been there to tell her that the home purchase was too high given her salary, she would have thought differently.
"Today, she owes $370K, and the BPO of the home is 170K."
She's underwater by 200K, and not 300K.
She's underwater by 200K, and not 300K.
Chris Rock has some good input on the subject:
"Shaq is rich. The white man who signs his check is wealthy."
If you're rich, you can buy an expensive house. If you're wealthy, you can forget exactly how many expensive houses you have.
"Shaq is rich. The white man who signs his check is wealthy."
If you're rich, you can buy an expensive house. If you're wealthy, you can forget exactly how many expensive houses you have.
I'm in a situation where I lost income after getting laid off, and as a result my mortgage and HOA dues are now close to 50% of my monthly pay after taxes. This makes things rather tight, since I have other bills to pay also.
Equity wise, I'm not underwater, but my place has lost enough value since buying it that I'm close.
The problem is the HOA. They're levying a $16,000 assessment for a repair (decks -- a lot of people have said that this figure seems too high to be reasonable).
Since they're not new decks, the value increase to the condo will be small. I'd have to stay in this place for a few years to break even... but in the process of financing that $16k, I would end up underwater, paying PMI, so my monthly payments would exceed 50% of my monthly income. (It's hard to start a new business with no spare income, too.)
Without the HOA special assessment and the HOA-driven extortion (they're going so far as to threaten to shut off utilities as well as foreclose, throwing extra junk fees and penalties my way in the process), I'd be able to refinance, lower my monthly payment, and be entirely out of debt.
To top this off, all of my options for financing are either credit cards (high interest) that I've been avoiding, or dependent on a high appraisal, which is very unlikely.
So, due to the HOA's assessment, I'm in a situation where my best financial option is to attempt a short sale and failing that foreclose. Though it would hurt my credit, it would also allow me to transition to somewhere with a MUCH lower cost of living (rents are low), and without any debts at all. Which is good for going to into business for myself, because I'd be able save enough money to live on for six months in... six months.
I don't know how things work when an HOA forecloses though. I will be talking to a lawyer to make sure that they can't come after me beyond my property if they foreclose, which they most likely will when they find out that I'm not going to pay the $16k or the $1600 in fees that they're throwing at me (some of which are unexplained, and some of which another person in condo management said might not even be legal).
I will never live anywhere with an HOA again.
Equity wise, I'm not underwater, but my place has lost enough value since buying it that I'm close.
The problem is the HOA. They're levying a $16,000 assessment for a repair (decks -- a lot of people have said that this figure seems too high to be reasonable).
Since they're not new decks, the value increase to the condo will be small. I'd have to stay in this place for a few years to break even... but in the process of financing that $16k, I would end up underwater, paying PMI, so my monthly payments would exceed 50% of my monthly income. (It's hard to start a new business with no spare income, too.)
Without the HOA special assessment and the HOA-driven extortion (they're going so far as to threaten to shut off utilities as well as foreclose, throwing extra junk fees and penalties my way in the process), I'd be able to refinance, lower my monthly payment, and be entirely out of debt.
To top this off, all of my options for financing are either credit cards (high interest) that I've been avoiding, or dependent on a high appraisal, which is very unlikely.
So, due to the HOA's assessment, I'm in a situation where my best financial option is to attempt a short sale and failing that foreclose. Though it would hurt my credit, it would also allow me to transition to somewhere with a MUCH lower cost of living (rents are low), and without any debts at all. Which is good for going to into business for myself, because I'd be able save enough money to live on for six months in... six months.
I don't know how things work when an HOA forecloses though. I will be talking to a lawyer to make sure that they can't come after me beyond my property if they foreclose, which they most likely will when they find out that I'm not going to pay the $16k or the $1600 in fees that they're throwing at me (some of which are unexplained, and some of which another person in condo management said might not even be legal).
I will never live anywhere with an HOA again.
> I will never live anywhere with an HOA again.
Good advice. It's hard to follow in many places, but it's still a good idea.
Note that local govts are a "super HOA" in some sense.
Good advice. It's hard to follow in many places, but it's still a good idea.
Note that local govts are a "super HOA" in some sense.
More like HOA's are a way to privatize many of the functions of local government, even allowing them to make rules (through contract law) that would be unconstitutional or unpassable in real government. The private police force in Robocop doesn't seem so far-fetched anymore.
There have been a few stories on NPR about HOA's that have been foreclosing on people for being a few hundred dollars behind on their HOA dues.
HOA's have a lot more power than they should, and there's been some push lately to create laws to reduce their power, but that's a pretty recent thing, and probably triggered by some HOA's getting desperate for money and becoming abusive.
They're capitalizing on the fact that we're trained to believe that our credit ratings are hugely important, and foreclosures trash them. With rental rates being as low as they are though, it's hard to see why I should tolerate this extortionist practice. If I can rile up some of the other owners to stand up to the management (not likely, I think they're largely sheep except for the one who's short-selling) I can probably put a stop to this, but otherwise, there's not much I can do other than stop paying my mortgage, let the HOA foreclose, and save raftloads of money by finding a place with relatively inexpensive rent.
HOA's have a lot more power than they should, and there's been some push lately to create laws to reduce their power, but that's a pretty recent thing, and probably triggered by some HOA's getting desperate for money and becoming abusive.
They're capitalizing on the fact that we're trained to believe that our credit ratings are hugely important, and foreclosures trash them. With rental rates being as low as they are though, it's hard to see why I should tolerate this extortionist practice. If I can rile up some of the other owners to stand up to the management (not likely, I think they're largely sheep except for the one who's short-selling) I can probably put a stop to this, but otherwise, there's not much I can do other than stop paying my mortgage, let the HOA foreclose, and save raftloads of money by finding a place with relatively inexpensive rent.
If anyone needed further confirmation that people respond to incentives, there you go.
This information was in a footnote in the morality paper that was submitted by another contributor. A "deficiency judgment" is when then bank can pursue the borrower to pay back the amount of the loss after a foreclosure. What's compelling about the footnote is a list of the states that offer non-recourse loans, which prevents banks from pursuing deficiency judgments.
BTW, one of my banks hired a debt collection agency to pursue the past payments. They are generally customer service oriented and friendly. But I had one encounter with a very aggressive rep who told me that I was required by law to pay, that because their bank was in TN, the laws of California were not in affect, and other inaccuracies. He was out of control and out of line. Just record those conversations, ask for his name, and his supervisor.
"While most states allow deficiency judgments, many states hardest hit by the housing crisis, including Arizona and California, are non-recourse states – meaning that a lender may not pursue a borrower for a deficiency judgment on a purchase money mortgage. See Andra Ghent and Marianna Kudlyak, Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States 5 (Federal Reserve Bank of Richmond Working Paper No. 09-10, July 10, 2009), available at http://ssrn.com/abstract=1432437 (listing Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Washington and Wisconsin as non-recourse states)."
BTW, one of my banks hired a debt collection agency to pursue the past payments. They are generally customer service oriented and friendly. But I had one encounter with a very aggressive rep who told me that I was required by law to pay, that because their bank was in TN, the laws of California were not in affect, and other inaccuracies. He was out of control and out of line. Just record those conversations, ask for his name, and his supervisor.
"While most states allow deficiency judgments, many states hardest hit by the housing crisis, including Arizona and California, are non-recourse states – meaning that a lender may not pursue a borrower for a deficiency judgment on a purchase money mortgage. See Andra Ghent and Marianna Kudlyak, Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States 5 (Federal Reserve Bank of Richmond Working Paper No. 09-10, July 10, 2009), available at http://ssrn.com/abstract=1432437 (listing Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Washington and Wisconsin as non-recourse states)."
In CA, only the purchase loan is non-recourse. Refinance loans are not non-recourse, that is, the lender can come after you if you bail on a refinance loan.
I'd guess that home equity loans (in CA) are also not non-recourse.
IANAL, YMMV.
I'd guess that home equity loans (in CA) are also not non-recourse.
IANAL, YMMV.
A purchase money loan can apply to a 1st and an equity line as long as both loans were taken out for the purchase of the home. In my situation, I put 10% down, took a 50% mortgage and 40% equity line.
"While most states allow deficiency judgments, many states hardest hit by the housing crisis, including Arizona and California, are non-recourse states"
Not coincidentally, I would add.
Not coincidentally, I would add.
So is Texas. And yet, they haven't experienced anything like the housing bubble as experienced elsewhere. So your point is?
Do you have a blog or something where you walk through the legal and financial calculations you made? I'm really interested in seeing how you enumerate and evaluate your options.
Sukotto. Unfortunately, no, I didn't publish the financial calculations that we made. But I can walk you through the basics of the analysis. We modeled out a few different scenarios:
- Real estate appreciation at 1%, 3%, 5% compounded.
- Whether we stayed with them as primary residences, or convert to rentals. Assumed that rental rates are mostly flat.
- In primary residences, we accounted for tax deductions from mortgage interest.
- We then made assumptions about the debt cancelled by taking the fair market value of our homes, minus the debt we owed, plus another 10K for unknown selling costs we would incur.
- We then estimated some sort of "cost" that we would both incur for having low credit for up to 7 years.
We then modeled all this out, and took a look at our net worth in 10 years on the assumption that we sold our homes at that time. We assume a 7% transaction fee for selling the homes.
In both of our cases, we came out ahead in all scenarios by pursuing a foreclosure. We figured out that we needed our houses to appreciate at 11% annually for 10 years in order for holding onto the home to be more profitable.
One last note, neither of us have large families, so we don't have the history, memories, fondness, and attachment to the homes that would have made this choice much harder. Fondness is something that can't be reasoned in spreadsheets.
We then modeled all this out, and took a look at our net worth in 10 years on the assumption that we sold our homes at that time. We assume a 7% transaction fee for selling the homes.
In both of our cases, we came out ahead in all scenarios by pursuing a foreclosure. We figured out that we needed our houses to appreciate at 11% annually for 10 years in order for holding onto the home to be more profitable.
One last note, neither of us have large families, so we don't have the history, memories, fondness, and attachment to the homes that would have made this choice much harder. Fondness is something that can't be reasoned in spreadsheets.
I am a big fan of Mish's Economic Analysis blog. He has covered the topic many times.
http://globaleconomicanalysis.blogspot.com/
(Make sure to read comments, and be very careful - your legal leeway differs greatly from state to state).
Also, google "Intentional Foreclosure" or "Strategic Default" + "your state".
http://globaleconomicanalysis.blogspot.com/
(Make sure to read comments, and be very careful - your legal leeway differs greatly from state to state).
Also, google "Intentional Foreclosure" or "Strategic Default" + "your state".
Do you lose any sleep over the ethics of it?
I lose sleep over people suggesting it is unethical. That is buying in hook, line, and sinker to the propaganda these companies would like you to believe. Deciding not to service debt is a tactical business decision made every single day. The same companies suggesting it is immoral in order to increase their own profits at the expense of struggling homeowners have all done the same exact thing without anyone ever suggesting it is immoral. You are choosing to exercise a clause of your contract and have every right to do so.
Also, declaring foreclosure is doing a great public service. It helps still inflated housing prices reach affordability. Californians spend more on housing than residents from any other state. If we were able to spend less money on housing it would have a positive impact on quality of living here.
TL;DR: I would trade my credit score for $250k in a heartbeat.
Also, declaring foreclosure is doing a great public service. It helps still inflated housing prices reach affordability. Californians spend more on housing than residents from any other state. If we were able to spend less money on housing it would have a positive impact on quality of living here.
TL;DR: I would trade my credit score for $250k in a heartbeat.
There is a clause in all of my software licenses that offers a refund, no questions asked. I am able to offer that clause in the faith that people will use it responsibly. If folks exercised it routinely on the theory "Hey, he lets me do it and that puts $30 in my pocket", I'd have to snip it or go out of business.
The extraordinarily lenient treatment of foreclosures, particularly in California, is also premised on them being rare events caused by black swans like personal financial catastrophe. If folks use them merely when they're net beneficial, the generous leniency afforded folks in personal catastrophe will not be extended next time.
Banks understand this. This is why, when they write contracts between each other, defaults do not result in "Oh, sure, keep the property for another twelve months and then mail the keys in and we're even stevens."
The extraordinarily lenient treatment of foreclosures, particularly in California, is also premised on them being rare events caused by black swans like personal financial catastrophe. If folks use them merely when they're net beneficial, the generous leniency afforded folks in personal catastrophe will not be extended next time.
Banks understand this. This is why, when they write contracts between each other, defaults do not result in "Oh, sure, keep the property for another twelve months and then mail the keys in and we're even stevens."
At first, I thought your argument was really compelling. But I think your analogy fails. You are implicitly equating taking a mortgage, not repaying it and continually living your home with buying your program, getting the refund, and continually using the program.
If you could remove the users ability to use the software when you refunded them $30, like the mortgage lender can when the homeowner stops living in it, you'd probably still be in business even with your clause.
On the other hand, if all of your users bought your software, thought it sucked and never used it again, and then got their refund, well, you should probably be out of business.
The OP's situation is not analogous. He is not free riding.
Edit: On the other hand, the year's worth of free rent before being evicted is to me a bit morally shady.
If you could remove the users ability to use the software when you refunded them $30, like the mortgage lender can when the homeowner stops living in it, you'd probably still be in business even with your clause.
On the other hand, if all of your users bought your software, thought it sucked and never used it again, and then got their refund, well, you should probably be out of business.
The OP's situation is not analogous. He is not free riding.
Edit: On the other hand, the year's worth of free rent before being evicted is to me a bit morally shady.
But he does get to stay in the house (for a year), because of the implicit assumption that knocking him out on his hindquarters when he stops paying would be discompassionate in the face of the catastrophe which caused his default.
As an aside: I do a functional-limited trial rather than a time-limited trial precisely because 100% of the use of the software for 48 hours satisfies the need for 95% of my customers. "First year free" would wreck my business pretty comprehensively if folks took advantage of it.
As an aside: I do a functional-limited trial rather than a time-limited trial precisely because 100% of the use of the software for 48 hours satisfies the need for 95% of my customers. "First year free" would wreck my business pretty comprehensively if folks took advantage of it.
Him getting to stay in the house for a year is due to the lengthy foreclosure process, a legal artifact, not due to any compassion on the bank's part.
I'm confused why you're using the word "compassion" at all, and coaching your argument in terms of how "compassionate" banks will be in their terms next time around.
Banks exist to make money, the terms they offer are a balance of how much risk they are willing to take, how much return they can earn, government regulation, and competition.
The OP does not owe the banks anything other than the terms of his contract, and the terms say that if he doesn't pay his mortgage he'll lose his house.
I'm confused why you're using the word "compassion" at all, and coaching your argument in terms of how "compassionate" banks will be in their terms next time around.
Banks exist to make money, the terms they offer are a balance of how much risk they are willing to take, how much return they can earn, government regulation, and competition.
The OP does not owe the banks anything other than the terms of his contract, and the terms say that if he doesn't pay his mortgage he'll lose his house.
Apples and Oranges.
A foreclosed house still has value and can be resold. The bank also retains all the mortgage payments made prior to foreclosure.
They can only lose their hat on a foreclosure if the home was overvalued. It's their responsibility to assess the property. I don't see why they get let off the social hook for playing fast and loose, yet we're expected to hold the lendee's feet to the fire for doing the same.
> "the generous leniency afforded folks in personal catastrophe will not be extended next time." What generous leniency from the other party? What leniency exists are legal/regulatory terms known to the bank before they signed the contract. If those terms increased their risk, it would be naive to assume they didn't increase their rates to cover the difference.
Further, don't misunderstand the huge glut of shadow inventory for compassion. The banks are simply dragging their feet to avoid admitting their losses.
A foreclosed house still has value and can be resold. The bank also retains all the mortgage payments made prior to foreclosure.
They can only lose their hat on a foreclosure if the home was overvalued. It's their responsibility to assess the property. I don't see why they get let off the social hook for playing fast and loose, yet we're expected to hold the lendee's feet to the fire for doing the same.
> "the generous leniency afforded folks in personal catastrophe will not be extended next time." What generous leniency from the other party? What leniency exists are legal/regulatory terms known to the bank before they signed the contract. If those terms increased their risk, it would be naive to assume they didn't increase their rates to cover the difference.
Further, don't misunderstand the huge glut of shadow inventory for compassion. The banks are simply dragging their feet to avoid admitting their losses.
You clearly have no idea what you're talking about.
First of all, the "extraordinarily lenient" treatment is nothing like lenient if you happen to have a second mortgage, which was pretty common during the crisis.
Second, banks can and do write contracts like that and have defaulted on them by returning the collateral and forfeiting their investment. There are tons of examples of banks doing just this that two seconds with google would have found for you.
Third, this punishment of banks by foreclosure is exactly the point. Socially, we do not want banks making loans that will not most likely be repaid; that's what leads to financial crises as we are currently experiencing with negative knockon effects expected to (optimistically) hinder the economy for 10 years.
Fourth, the banks were asked by the government, and by good conscience, to make a fair deal with homeowners. The government is subsidizing taking the loss on the mortgage and reducing the principle to something reflecting reality. For various reasons, banks are choosing not do to this. Foreclosure is the proper response.
First of all, the "extraordinarily lenient" treatment is nothing like lenient if you happen to have a second mortgage, which was pretty common during the crisis.
Second, banks can and do write contracts like that and have defaulted on them by returning the collateral and forfeiting their investment. There are tons of examples of banks doing just this that two seconds with google would have found for you.
Third, this punishment of banks by foreclosure is exactly the point. Socially, we do not want banks making loans that will not most likely be repaid; that's what leads to financial crises as we are currently experiencing with negative knockon effects expected to (optimistically) hinder the economy for 10 years.
Fourth, the banks were asked by the government, and by good conscience, to make a fair deal with homeowners. The government is subsidizing taking the loss on the mortgage and reducing the principle to something reflecting reality. For various reasons, banks are choosing not do to this. Foreclosure is the proper response.
"I lose sleep over people suggesting it is unethical not to tip your waiter. That is buying in hook, line, and sinker to the propaganda these labor providers would like you to believe. Deciding not to tip your waiter is a tactical business decision...
TL;DR: I would trade the ability to return to this restaurant and get good service for $8 in a heartbeat."
See the flaw in this argument? There are established standards of behavior in our society; tipping your waiter, paying off your mortgage if you are able to, etc. Sometimes circumstances give you the ability to flout these standards without contractual consequence, but that doesn't make it ethical to do so.
TL;DR: I would trade the ability to return to this restaurant and get good service for $8 in a heartbeat."
See the flaw in this argument? There are established standards of behavior in our society; tipping your waiter, paying off your mortgage if you are able to, etc. Sometimes circumstances give you the ability to flout these standards without contractual consequence, but that doesn't make it ethical to do so.
I disagree... after all, these same banks (and there are only a handful at the end of the day) precipitated the crisis that led to these homes being so far underwater in the first place. Why is only one side ethically bound to play 'fair'? After all, these same companies you are 'obligated' to pay chose to engage in business practices that greatly contributed to the huge run-up in housing costs while at the same time leading to this huge crash (while shorting against it the whole time in some cases).
So if one side gets to operate as a business with no ethical standards, why should I as a homeowner be held to a different standard? At the end of the day I'm responsible to my shareholders (myself and my family), and I have to make the decisions that put me in the best financial situation I possibly can.
Note: I currently own a home in Plano, TX that is around $30k under water. It's currently a money-losing rental, but if that rental income where to stop... so would my mortgage payments. I'm more than prepared to walk away from that catastrophe.
So if one side gets to operate as a business with no ethical standards, why should I as a homeowner be held to a different standard? At the end of the day I'm responsible to my shareholders (myself and my family), and I have to make the decisions that put me in the best financial situation I possibly can.
Note: I currently own a home in Plano, TX that is around $30k under water. It's currently a money-losing rental, but if that rental income where to stop... so would my mortgage payments. I'm more than prepared to walk away from that catastrophe.
1) Anyone who bought a house is just as guilty of precipitating the crisis as the banks. Both home-borrowers and banks took a long position on housing on the theory that it would go up. The only people not guilty of precipitating the crisis are the people who shorted housing or remained neutral.
2) The societal norms in b2b deals are different than in home mortgages. No one expects you to exercise an out of the money call option, but you are expected to exercise an out of the money mortgage. Similarly, the societal norms when hiring a web designer are different from the norms when dealing with a waiter. You tip your waiter, you don't tip your web designer.
This does not make it ethical for you not to tip your waiter, even if you say "but I'm doing it for the benefit of my family". Similarly, the fact that different norms of behavior apply to corporate debt than to mortgage debt does not make it ethical to ignore societal norms.
[edit: to clarify, I do mean that it's unethical not to tip your waiter in the event of good service, as tim points out below.]
2) The societal norms in b2b deals are different than in home mortgages. No one expects you to exercise an out of the money call option, but you are expected to exercise an out of the money mortgage. Similarly, the societal norms when hiring a web designer are different from the norms when dealing with a waiter. You tip your waiter, you don't tip your web designer.
This does not make it ethical for you not to tip your waiter, even if you say "but I'm doing it for the benefit of my family". Similarly, the fact that different norms of behavior apply to corporate debt than to mortgage debt does not make it ethical to ignore societal norms.
[edit: to clarify, I do mean that it's unethical not to tip your waiter in the event of good service, as tim points out below.]
1) Anyone who bought a house is just as guilty of precipitating the crisis as the banks...
This is true to a degree. But remember that banks and real estate investors are expected to be much more knowledgeable and sophisticated players in the market than someone buying one house as a primary residence.
Similarly, the societal norms when hiring a web designer are different from the norms when dealing with a waiter. You tip your waiter, you don't tip your web designer.
I am a DBA, not a web designer, but I have gotten bonuses above and beyond the agreed upon minimum in both full time and contract work. This is very similar to a tip and often they arrive at the number in a similar way (a percentage with percentage based loosely on their evaluation of my performance).
Also, it is worth noting that the tradition of tipping came from a desire to secure exemplary services. Personally, I consider it quite ethical to not tip if the service is subpar and I will tip generously if it is better than I expected.
This is true to a degree. But remember that banks and real estate investors are expected to be much more knowledgeable and sophisticated players in the market than someone buying one house as a primary residence.
Similarly, the societal norms when hiring a web designer are different from the norms when dealing with a waiter. You tip your waiter, you don't tip your web designer.
I am a DBA, not a web designer, but I have gotten bonuses above and beyond the agreed upon minimum in both full time and contract work. This is very similar to a tip and often they arrive at the number in a similar way (a percentage with percentage based loosely on their evaluation of my performance).
Also, it is worth noting that the tradition of tipping came from a desire to secure exemplary services. Personally, I consider it quite ethical to not tip if the service is subpar and I will tip generously if it is better than I expected.
> The societal norms in b2b deals are different than in home mortgages.
Yes, but they shouldn't be, and many people are starting to figure this out. When the bank loaned you the money, they knew they were taking a risk and they get the home as collateral. There's no reason not to walk out on a deal gone bad just like any business would. The idea that it's immoral to foreclose is simply absurd, it isn't breaking the contract, it's exercising the out clause of it, and for that the bank will get the property.
Yes, but they shouldn't be, and many people are starting to figure this out. When the bank loaned you the money, they knew they were taking a risk and they get the home as collateral. There's no reason not to walk out on a deal gone bad just like any business would. The idea that it's immoral to foreclose is simply absurd, it isn't breaking the contract, it's exercising the out clause of it, and for that the bank will get the property.
The fact that you are not breaking a contract does not make the act moral. Again, is it moral for me not to tip even if the service is good (something I have no contractual obligation to do)?
It's fully moral to have a society where no one tips. Prices would be 15-20% higher, waiters would get a higher hourly wage, and it would be fully moral not to tip. That does not make it moral not to tip (when appropriate) in our society.
It would be fully moral to have a society in which mortgages are treated as call options on a house owned by the bank. Interest rates/prices would be higher, banks would fully expecting strategic default whenever it became reasonable to do so, and strategic default would be fully moral. That does not make it moral to treat mortgages as call options in our society.
Social norms matter, and it is indeed immoral to take advantage of people who reasonably assume you will behave according to established norms.
It's fully moral to have a society where no one tips. Prices would be 15-20% higher, waiters would get a higher hourly wage, and it would be fully moral not to tip. That does not make it moral not to tip (when appropriate) in our society.
It would be fully moral to have a society in which mortgages are treated as call options on a house owned by the bank. Interest rates/prices would be higher, banks would fully expecting strategic default whenever it became reasonable to do so, and strategic default would be fully moral. That does not make it moral to treat mortgages as call options in our society.
Social norms matter, and it is indeed immoral to take advantage of people who reasonably assume you will behave according to established norms.
I really don't think there's an "established social norm" that you're expected to suffer a loss of hundreds of thousands of dollars when you don't legally have to. In a normal housing market, people pay their mortgages not because it's the moral thing to do, but because if they don't they'll lose the house and have their credit trashed. Only recently have banks made large numbers of loans where those deterrents are insufficient. It seems perfectly reasonable that since both the banks and the homebuyers made foolish decisions, they should share the pain.
So it's immoral not to follow societal norms? Is it immoral to have a pink mohawk?
I think you're right that there can be implicit agreements in place such as the agreement to tip your waiter. The waiter example is quite different because you've made an implicit agreement. The point of a contract is to leave nothing implicit.
Also, part of the confusion here is that there is no precedence to say what the societal norm is. Housing prices have never fallen this much before in our society.
I think you're right that there can be implicit agreements in place such as the agreement to tip your waiter. The waiter example is quite different because you've made an implicit agreement. The point of a contract is to leave nothing implicit.
Also, part of the confusion here is that there is no precedence to say what the societal norm is. Housing prices have never fallen this much before in our society.
> Social norms matter, and it is indeed immoral to take advantage of people who reasonably assume you will behave according to established norms.
You are not taking advantage of the bank anymore than they're taking advantage of you. They knew up front that you might default, penalties are in the contract.
It's not immoral, it's business. That most people have been hoodwinked into thinking it's immoral benefits the bank, so they're happy to feed that delusion, but it is a delusion.
You are not taking advantage of the bank anymore than they're taking advantage of you. They knew up front that you might default, penalties are in the contract.
It's not immoral, it's business. That most people have been hoodwinked into thinking it's immoral benefits the bank, so they're happy to feed that delusion, but it is a delusion.
A bit off-topic, but I don't see how tipping waiters turned into an ethics issue. A tip is for good service (originally, anyway). Now it's an entitlement. I would much prefer the restaurant owner to actually pay a real wage and charge me for it up-front, rather than a hidden social obligation on the back end.
> I disagree... after all, these same banks (and there are only a handful at the end of the day) precipitated the crisis that led to these homes being so far underwater in the first place.
Actually, no. The housing crisis was US govt created.
Govt agencies sued and restricted other activities of banks that didn't make dumb loans. Govt agencies gave special treatement to banks that used mortage banked securities with govt-approved insurance as their "regulated assets".
And then we had Fannie and Freddie lying about the loans in those securities, which threw off everyone's risk analysis.
And we're still pissing tax money into propping up the housing market via Fannie and Freddie.
FWIW, McCain actually tried to get Fannie and Freddie under control in 2005-6 He got his teeth kicked in. (To be fair, Bush didn't back him up.)
And yes, Fannie and Freddie execs of the relevant time frame were a who's-who of dem party leadership. Some of them are now in the Obama administration while others had prominent roles in his campaign.
Actually, no. The housing crisis was US govt created.
Govt agencies sued and restricted other activities of banks that didn't make dumb loans. Govt agencies gave special treatement to banks that used mortage banked securities with govt-approved insurance as their "regulated assets".
And then we had Fannie and Freddie lying about the loans in those securities, which threw off everyone's risk analysis.
And we're still pissing tax money into propping up the housing market via Fannie and Freddie.
FWIW, McCain actually tried to get Fannie and Freddie under control in 2005-6 He got his teeth kicked in. (To be fair, Bush didn't back him up.)
And yes, Fannie and Freddie execs of the relevant time frame were a who's-who of dem party leadership. Some of them are now in the Obama administration while others had prominent roles in his campaign.
>Actually, no. The housing crisis was US govt created.
I have read this so many times, and I keep looking for something that backs it up. Yes, the US government made mistakes in this, but "caused" it? Please. I worked briefly in the mortgage business, just at the the subprime crisis hit, and I held a license.
The operative word is "sub-prime". A sub-prime loan is one that does not meet the Fannie/Freddie requirements to be sold in the secondary market, and thus is not handled by Fannie/Freddie. Sub-prime loans were all that was available to many people with bad credit, and sub-prime was specifically not standardized (as "conforming" loans are). With all the various details and options and tricky features, each loan was unique and it was impossible for a borrower to take your loan offer down the street and compare it with a loan from another company. Thus, the simple fact that they were getting a loan meant that they shut up and took the crap you offered, with ridiculously high fees. At the time, for example, you could get a sub-prime loan closed in a couple of weeks, with great fees, or you could wait six or seven weeks for FHA to work their process (and that FHA clerk is not getting a bonus at the end of the year for the number of loans they process).
Fannie and Freddie went down because they bought the mortgage backed securities as investments, not because they wrote the original loans (or accepted them in the secondary market) themselves. It's actually pretty weird that they drank their own Kool-Aid about how great an investment MBSs were.
I have read this so many times, and I keep looking for something that backs it up. Yes, the US government made mistakes in this, but "caused" it? Please. I worked briefly in the mortgage business, just at the the subprime crisis hit, and I held a license.
The operative word is "sub-prime". A sub-prime loan is one that does not meet the Fannie/Freddie requirements to be sold in the secondary market, and thus is not handled by Fannie/Freddie. Sub-prime loans were all that was available to many people with bad credit, and sub-prime was specifically not standardized (as "conforming" loans are). With all the various details and options and tricky features, each loan was unique and it was impossible for a borrower to take your loan offer down the street and compare it with a loan from another company. Thus, the simple fact that they were getting a loan meant that they shut up and took the crap you offered, with ridiculously high fees. At the time, for example, you could get a sub-prime loan closed in a couple of weeks, with great fees, or you could wait six or seven weeks for FHA to work their process (and that FHA clerk is not getting a bonus at the end of the year for the number of loans they process).
Fannie and Freddie went down because they bought the mortgage backed securities as investments, not because they wrote the original loans (or accepted them in the secondary market) themselves. It's actually pretty weird that they drank their own Kool-Aid about how great an investment MBSs were.
> Actually, no. The housing crisis was US govt created.
Noted conservative Krugman suggested creating a housing bubble after the dot-com bubble and applauded it during the early stages.
Noted conservative Krugman suggested creating a housing bubble after the dot-com bubble and applauded it during the early stages.
Stop getting your lies from Fox news. You're completely and utterly wrong.
For starters, Fannie and Freddie had their share of the mortgage market plummet during the bubble years. The loans they've made performed much better than other syndicated bank loans. The risk analyses were improperly done by the ratings agencies, and their basis were not (or should not) have been primarily Fannie/Freddie data.
Also, do you have any evidence at all besides the ravings of Fox news personalities about the government suing to force issuance of bad loans?
Please, do learn something about the situation. A great place to start is the blogs Calculated Risk or Naked Capitalism.
For starters, Fannie and Freddie had their share of the mortgage market plummet during the bubble years. The loans they've made performed much better than other syndicated bank loans. The risk analyses were improperly done by the ratings agencies, and their basis were not (or should not) have been primarily Fannie/Freddie data.
Also, do you have any evidence at all besides the ravings of Fox news personalities about the government suing to force issuance of bad loans?
Please, do learn something about the situation. A great place to start is the blogs Calculated Risk or Naked Capitalism.
> The risk analyses were improperly done by the ratings agencies, and their basis were not (or should not) have been primarily Fannie/Freddie data.
You mean the rating agencies that were granted a monopoly on ratings by the SEC.... That monopoly meant that their ratings were unquestioned.
> Stop getting your lies from Fox news. You're completely and utterly wrong.
I note that none of your points actually refute my claim.
Fannie and Freddie's market share isn't the whole story. In fact, the bigger story was regulatory treatment of mortgage backed securities, which is why I emphasized it.
> Also, do you have any evidence at all besides the ravings of Fox news personalities about the government suing to force issuance of bad loans?
You've never heard of CRA?
From Wikipedia.
"The new Gramm-Leach-Bliley Act's FDIC related provisions, along with the addition of sub-section § 2903(c) directly to Title 12, insured any bank holding institution wishing to be re-designated as a financial holding institution by the Board of Governors of the Federal Reserve System would also have to follow Community Reinvestment Act compliance guidelines before any merger or expansion could take effect.[61]"
You mean the rating agencies that were granted a monopoly on ratings by the SEC.... That monopoly meant that their ratings were unquestioned.
> Stop getting your lies from Fox news. You're completely and utterly wrong.
I note that none of your points actually refute my claim.
Fannie and Freddie's market share isn't the whole story. In fact, the bigger story was regulatory treatment of mortgage backed securities, which is why I emphasized it.
> Also, do you have any evidence at all besides the ravings of Fox news personalities about the government suing to force issuance of bad loans?
You've never heard of CRA?
From Wikipedia.
"The new Gramm-Leach-Bliley Act's FDIC related provisions, along with the addition of sub-section § 2903(c) directly to Title 12, insured any bank holding institution wishing to be re-designated as a financial holding institution by the Board of Governors of the Federal Reserve System would also have to follow Community Reinvestment Act compliance guidelines before any merger or expansion could take effect.[61]"
The ethical failing around gratuities is that businesses provide diminished wages to their employees knowing that you'll fill the gap with what should be a "gift or favor given without obligation". In the case of both the mortgage and the gratuity, the business is using your adherence to norms to boost their profits at your expense.
You make some interesting points, but I must respectfully disagree.
A loan to an individual is an agreement to repay that according to terms. I believe that there is indeed a moral obligation to attempt to fulfill that contract. The foreclosure clauses are meant to handle the cases where the borrower tries and fails to live up those obligations, not the case where the borrower chooses to ignore the obligations they agreed to.
A loan to an individual is an agreement to repay that according to terms. I believe that there is indeed a moral obligation to attempt to fulfill that contract. The foreclosure clauses are meant to handle the cases where the borrower tries and fails to live up those obligations, not the case where the borrower chooses to ignore the obligations they agreed to.
A loan to an individual is an agreement to repay that according to terms.
Or to not repay and accept the specified consequences.
I believe that there is indeed a moral obligation to attempt to fulfill that contract.
Giving up the house does fulfill the contract. The only debatable point that I see is whether it's ok to live in the house without making any payments while the foreclosure process moves forward, or whether you should hand the keys to the bank right away.
Or to not repay and accept the specified consequences.
I believe that there is indeed a moral obligation to attempt to fulfill that contract.
Giving up the house does fulfill the contract. The only debatable point that I see is whether it's ok to live in the house without making any payments while the foreclosure process moves forward, or whether you should hand the keys to the bank right away.
If you could pay and just didn't...I would call that unethical. That doesn't mean it doesn't make good business sense.
A service?
So it's good for your neighbors that you're helping drive the values of their properties down? That's good for them?
Talk about rationalizations...
So it's good for your neighbors that you're helping drive the values of their properties down? That's good for them?
Talk about rationalizations...
Someone asked me if I am losing sleep over the ethics of the situation. I think there are two separate issues:
Ethically. I'm ok. This is because a mortgage has pre-arranged clauses in the contract that outline what the exit criteria are for the bank and the borrower. It's a contract with a pre-negotiated process around a divorce. A prenuptual if you will. In this case, we are just choosing to execute one of the clauses in the contract, as any business has the right to do. So, there is nothing unethical about adhering to the contract.
Morally. There are concerns about short sales and foreclosures bringing down property values in the neighborhood. And that is an overall market affect. And there is a concern that this action brings down the overall market. It's the same as what happens when the stock market has a sell off - every time a stock is sold in repeating fashion, the overall value of the market declines as there is more cash on the side. Morally, I am personally ok, because the expectation with me and my fellow neighborhood residents was that we were all seeking asset appreciation, and when that didn't occur, there was an understanding that we may all have to pursue options to rectify the situation. I was open with my peer group about that 5 years ago when first buying the property. If I had lied about my intentions, it would be a different story.
Also, and I forgot to mention this. In both of our cases, we have changed our job situation such that it is not profitable on a monthly basis to continue paying our mortage and there is no refinancing situation that makes it profitable. And we both explored conversion to rentals. We'd be in a situation where monthly, we were expending nearly 3K / month in losses if they were both rentals.
Ethically. I'm ok. This is because a mortgage has pre-arranged clauses in the contract that outline what the exit criteria are for the bank and the borrower. It's a contract with a pre-negotiated process around a divorce. A prenuptual if you will. In this case, we are just choosing to execute one of the clauses in the contract, as any business has the right to do. So, there is nothing unethical about adhering to the contract.
Morally. There are concerns about short sales and foreclosures bringing down property values in the neighborhood. And that is an overall market affect. And there is a concern that this action brings down the overall market. It's the same as what happens when the stock market has a sell off - every time a stock is sold in repeating fashion, the overall value of the market declines as there is more cash on the side. Morally, I am personally ok, because the expectation with me and my fellow neighborhood residents was that we were all seeking asset appreciation, and when that didn't occur, there was an understanding that we may all have to pursue options to rectify the situation. I was open with my peer group about that 5 years ago when first buying the property. If I had lied about my intentions, it would be a different story.
Also, and I forgot to mention this. In both of our cases, we have changed our job situation such that it is not profitable on a monthly basis to continue paying our mortage and there is no refinancing situation that makes it profitable. And we both explored conversion to rentals. We'd be in a situation where monthly, we were expending nearly 3K / month in losses if they were both rentals.
In this case, we are just choosing to execute one of the clauses in the contract, as any business has the right to do. So, there is nothing unethical about adhering to the contract.
Agreed. The only thing I'm not fully on board with is staying in the house rent free for 12 months while waiting for the foreclosure process to complete. I can't quite explain why, but taking advantage of the slowness of the legal system seems different and less respectable than exercising the default option in the mortgage contract.
There are concerns about short sales and foreclosures bringing down property values in the neighborhood.
I wouldn't even worry about that. I've yet to hear any compelling explanation as to why high home prices are on balance a good thing. If car prices were to double because of a shortage of steel or something, we'd correctly realize that's a bad thing, even though everybody who owns a car would be richer on paper.
Agreed. The only thing I'm not fully on board with is staying in the house rent free for 12 months while waiting for the foreclosure process to complete. I can't quite explain why, but taking advantage of the slowness of the legal system seems different and less respectable than exercising the default option in the mortgage contract.
There are concerns about short sales and foreclosures bringing down property values in the neighborhood.
I wouldn't even worry about that. I've yet to hear any compelling explanation as to why high home prices are on balance a good thing. If car prices were to double because of a shortage of steel or something, we'd correctly realize that's a bad thing, even though everybody who owns a car would be richer on paper.
The only thing I'm not fully on board with is staying in the house rent free for 12 months while waiting for the foreclosure process to complete. I can't quite explain why, but taking advantage of the slowness of the legal system seems different and less respectable than exercising the default option in the mortgage contract.
I sympathize with your concerns, but one justification for staying rent free in the house is that it is a hedge against malicious bank activity. For example, in some cities, banks have initiated foreclosure proceedings against people who then dutifully move out, but the bank never takes possession of the property and never notifies the previous owners. As a result, ownership rebounds back to them, and they end up on the hook for tens of thousands of dollars of back taxes and fines. Make no mistake, if you abandon your home for a few years, you will eventually have to pay a lot of money.
Now, if your bank was one of the banks that engaged in this behavior, you might be justified sitting in the home rent free: after all, you have no way of knowing if the bank is about to force you to incur costs that accrue by vacating the house. At least if you're sitting in the house, you can keep vagrants from moving in, perform basic maintenance like leak protection and do other things that will minimize the penalty you'll take if the bank ends up refusing to take ownership after initiating foreclosure.
I sympathize with your concerns, but one justification for staying rent free in the house is that it is a hedge against malicious bank activity. For example, in some cities, banks have initiated foreclosure proceedings against people who then dutifully move out, but the bank never takes possession of the property and never notifies the previous owners. As a result, ownership rebounds back to them, and they end up on the hook for tens of thousands of dollars of back taxes and fines. Make no mistake, if you abandon your home for a few years, you will eventually have to pay a lot of money.
Now, if your bank was one of the banks that engaged in this behavior, you might be justified sitting in the home rent free: after all, you have no way of knowing if the bank is about to force you to incur costs that accrue by vacating the house. At least if you're sitting in the house, you can keep vagrants from moving in, perform basic maintenance like leak protection and do other things that will minimize the penalty you'll take if the bank ends up refusing to take ownership after initiating foreclosure.
I think we are in agreement about the morality.
This is why I think it is wrong to live rent free in the house. It is acting in bad faith to sign a mortgage on a house knowing full well that you do not intend to pay back a cent and live in it for a year.
On the other hand, maybe we could just label it strategic renting and blame the mortgage broker for signing the contract :P.
This is why I think it is wrong to live rent free in the house. It is acting in bad faith to sign a mortgage on a house knowing full well that you do not intend to pay back a cent and live in it for a year.
On the other hand, maybe we could just label it strategic renting and blame the mortgage broker for signing the contract :P.
It is acting in bad faith to sign a mortgage on a house knowing full well...
Wait, that's not what happened.
Wait, that's not what happened.
Ethically. I'm ok. This is because a mortgage has pre-arranged clauses in the contract that outline what the exit criteria are for the bank and the borrower. It's a contract with a pre-negotiated process around a divorce. A prenuptual if you will. In this case, we are just choosing to execute one of the clauses in the contract, as any business has the right to do. So, there is nothing unethical about adhering to the contract.
This is one of the arguments I've seen that doesn't sit well with me. How is this different from saying that it's ethical to steal money from a convenience store, because I'm willing to go to prison for it? After all, jail time is the pre-negotiated outcome for thieves, and I might decide I'd rather have the money and do the jail time rather than refraining from stealing in the first place.
Apart from one being in the criminal realm and the other in the civil, what's the difference? Or is that the difference that justifies the one and not the other? (Why?)
This is one of the arguments I've seen that doesn't sit well with me. How is this different from saying that it's ethical to steal money from a convenience store, because I'm willing to go to prison for it? After all, jail time is the pre-negotiated outcome for thieves, and I might decide I'd rather have the money and do the jail time rather than refraining from stealing in the first place.
Apart from one being in the criminal realm and the other in the civil, what's the difference? Or is that the difference that justifies the one and not the other? (Why?)
There are social and religious experts much more qualified than me to address your question.
However, I've heard stories from social experts that indicate it is ethical to conduct crime, organized or otherwise, because the consequences are defined. In your scenario, though, stealing's punishment is jail and repayment of the amount stolen. So, the trade off is a bit different.
That's not my position on the matter, but it's thought provoking.
Morality on the other hand...
However, I've heard stories from social experts that indicate it is ethical to conduct crime, organized or otherwise, because the consequences are defined. In your scenario, though, stealing's punishment is jail and repayment of the amount stolen. So, the trade off is a bit different.
That's not my position on the matter, but it's thought provoking.
Morality on the other hand...
It seems if one were to listen to those social experts, all of society would become a game of incentives and disincentives where the goal is finding the mismatched pairs (i.e. action where incentive outweighs disincentive, regardless of what the action is - whether it be walking away from a mortgage or robbing a store). In that scheme ethics (and morality - I don't think there's a difference) become purely relative, because value is an inherently relative concept.
Not being a moral relativist, I naturally disagree with the idea that such a society is desirable or that ethics in that case are even meaningful at all. :) Which is one of the things that disturbs me about the idea of an action being ethical just because it's defined in a contract.
Not being a moral relativist, I naturally disagree with the idea that such a society is desirable or that ethics in that case are even meaningful at all. :) Which is one of the things that disturbs me about the idea of an action being ethical just because it's defined in a contract.
The store owner did not consent to the robbery, by definition. The bank consented to the contract and agreed that the home would be sufficient collateral for the loan.
I thought of this. However, I think in the abstract that's not a material difference, because (at least in theory), the "punishment should fit the crime"...society agrees that X punishment is sufficient tradeoff for Y crime. Granted, the store owner doesn't individually make an agreement with the thief, but over time that societal agreement was made nevertheless.
Except for the fact that exercising a clause in a contract isn't a crime.
True, which I originally pointed out. Although I don't have my mortgage contract in front of me (and am open to correction here), my recollection is that a foreclosure is the defined consequence of me breaking the contract I agreed to - that is, to repay my debt at a rate of $X per month. "Exercising a clause" is a euphemism for "breach of contract" in that case, isn't it? If so, I think the analogy to crime is applicable. If not, then admittedly the analogy is indeed broken.
"Exercising a clause" is by definition NOT breaching the contract -- it IS part of the contract.
Home loans are based on collateral. You borrow money to take ownership of the collateral, and if you pay back the loan, you get to keep it. If you do NOT pay back the loan, the lending institution reclaims ownership of that collateral according to the contract.
This is mutual protection because things can change for the worse as well as for the better in the future.
Home loans are based on collateral. You borrow money to take ownership of the collateral, and if you pay back the loan, you get to keep it. If you do NOT pay back the loan, the lending institution reclaims ownership of that collateral according to the contract.
This is mutual protection because things can change for the worse as well as for the better in the future.
Crime isn't breach of contract. It's breaking the law. The law isn't a contract, it's a codified set of rules put forth by a legislative body. Contracts are subordinate to the law in America.
Ethics? According to their contract, if they stop making payments the bank gets the house. There's nothing unethical about exercising that contingency.
I agree, but take it one step further: it is unethical NOT to walk away.
The whole point of the clause is to ensure everyone is taking equal risk in evaluating the property: the bank and the owner. It is bad for banks to make loans without suitable collateral. It is bad for you to take loans you can't afford.
In an overheated housing market, the house is NOT good collateral. The banks made a well-researched business decision to give you the mortgage with the house as collateral. They made a mistake (as did you) and everyone loses. The bank gets killed on the mortgage and you get killed on your original equity, interest and credit rating.
It would be unethical not to walk away as this would encourage everyone to repeat the bad behavior.
The whole point of the clause is to ensure everyone is taking equal risk in evaluating the property: the bank and the owner. It is bad for banks to make loans without suitable collateral. It is bad for you to take loans you can't afford.
In an overheated housing market, the house is NOT good collateral. The banks made a well-researched business decision to give you the mortgage with the house as collateral. They made a mistake (as did you) and everyone loses. The bank gets killed on the mortgage and you get killed on your original equity, interest and credit rating.
It would be unethical not to walk away as this would encourage everyone to repeat the bad behavior.
[deleted]
This is an interesting article that explores the ethics and morality of walking away from a mortgage.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1597835
Frankly, I'm torn about whether or not I would do the same in a similar situation. I hope I never find out.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1597835
Frankly, I'm torn about whether or not I would do the same in a similar situation. I hope I never find out.
I read that just now. I agree with them. I think conscience is what stymies people sometimes because society has beaten into them a certain behavior. It took a painful year for me to go through foreclosure...but after reading that...I have a clearer understanding of what the contract aspect means. I am not saying everyone should foreclose just weigh the options from a more pragmatic view.
I know someone who is considering going through the same process. How did you go about finding a lawyer to help you with the process? Once you decided to do it, what steps did you to prepare for it?
I'd really appreciate if you could email me so I could ask some other questions my friend has. peter at pchristensen dot com. I could buy you a drink for a few minutes of your time.
I'd really appreciate if you could email me so I could ask some other questions my friend has. peter at pchristensen dot com. I could buy you a drink for a few minutes of your time.
wow - no words about personal responsibility, no self-reflection about what 'your word' means or what it means to agree to a commitment.
Just a plan to weasel out.
I'm flabbergasted.
Just a plan to weasel out.
I'm flabbergasted.
Where is my 6-12 months of free rent?
There is absolutely no moral or ethical dilemma in "jingle-mail". These banks handed out huge no-money down loans like candy to people who bought way more house (and in some case multiple houses) than they could legitimately afford. Both parties were complicit in a transaction that should never have occurred. Now that the inevitable has occurred and the music has stopped, the only thing that matters is the letter of the law regarding the contract. If the bank proposed/agreed to a no-recourse loan, just walk away.
Morality aside, jingle-mail is also the healthiest solution from a market perspective. The faster banks are forced to take their lumps, move these foreclosures through the market, and return lending standards to their historical norms (e.g. 20% down), the sooner the housing market can return to normalcy.
Morality aside, jingle-mail is also the healthiest solution from a market perspective. The faster banks are forced to take their lumps, move these foreclosures through the market, and return lending standards to their historical norms (e.g. 20% down), the sooner the housing market can return to normalcy.
Banks and businesses have been doing this for years. They weigh the economic impact of supporting an unprofitable entity versus the impact of letting it go. I don't see why people insist that other people are "morally" obliged to continue to pay a mortgage.
A mortgage is a business contract. The banks evaluate you in terms of risk of not paying and you evaluate the prospects of the mortgage contract they write for you. There's no blood oath or secret brotherhood you join.
A mortgage is a business contract. The banks evaluate you in terms of risk of not paying and you evaluate the prospects of the mortgage contract they write for you. There's no blood oath or secret brotherhood you join.
Here are some earlier submissions on this and similar topics:
http://news.ycombinator.com/item?id=1491252
http://news.ycombinator.com/item?id=1175576
http://news.ycombinator.com/item?id=1011716
http://news.ycombinator.com/item?id=726110 <- This has lots of comments
http://news.ycombinator.com/item?id=1491252
http://news.ycombinator.com/item?id=1175576
http://news.ycombinator.com/item?id=1011716
http://news.ycombinator.com/item?id=726110 <- This has lots of comments
There is a big difference between regular debt and collateral-backed debt. The whole point of a loan backed by a collateral (in this case, the house) is that the lender gets said collateral upon default. Mortgage lenders are not "screwed" by foreclosures - they would love a foreclosure on a house whose value is up.
Banks do not count on your paying off the house - if they did, they would not explicitly demand your house as a collateral upfront. They are exactly like the pawn shop owner who takes your wedding ring in exchange for some cash. It's not a moral obligation on the part of the owner to buy the ring back if the price of gold goes down to the point where it's cheaper to buy a new ring - so why is it a moral obligation on the part of the home owner to buy the house back from the bank?
Perhaps those rich people are not "ruthless" - perhaps they are rich because they understand things like that.
Banks do not count on your paying off the house - if they did, they would not explicitly demand your house as a collateral upfront. They are exactly like the pawn shop owner who takes your wedding ring in exchange for some cash. It's not a moral obligation on the part of the owner to buy the ring back if the price of gold goes down to the point where it's cheaper to buy a new ring - so why is it a moral obligation on the part of the home owner to buy the house back from the bank?
Perhaps those rich people are not "ruthless" - perhaps they are rich because they understand things like that.
Quote of the day: "The rich are different: they are more ruthless"
Not necessarily ruthless, but money literate.
I'd rather reserve my kindness and good manners for actual people. Banks are, in a way, abstract machines made of policies, rules and procedures. You do not gently talk to your computer; you type the command as outlined in the fine manual.
I'd rather reserve my kindness and good manners for actual people. Banks are, in a way, abstract machines made of policies, rules and procedures. You do not gently talk to your computer; you type the command as outlined in the fine manual.
It makes sense if you took out an overblown mortgage and are in a big negative equity situation. If that's the case then getting rid of the property as soon as possible is really just about cutting your losses to the minimum.
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It's fucking pathetic that both banks and homeowners look for a bail out from the tax payers who were fiscally responsible. Why is there no punishment for people being stupid and why should responsible citizens help you keep the house that's bigger and better than theirs with a government bailout? Does anyone have any integrity or pride in themselves anymore?
Walking away from a mortgage you signed is about as responsible as the banks asking for bail outs!
Walking away from a mortgage you signed is about as responsible as the banks asking for bail outs!
I'm currently in the process of walking away from a home out of state. I moved from Delaware to California close to 3 years ago due to a really good job opportunity. I couldn't take the hit in selling our house at the time since it was underwater, so I wound up renting it out. Through that time I have had 2 renters on the property, both of whom wound up walking away from their leases. The last renters trashed the place and I could not afford to get it fixed up enough to rent it out again.
So I was stuck with an unrentable home out of state that I could not afford to fix up and could barely afford the mortgage payments on. Therefore I just decided to simply walk away from it.
Given that context, I simply cannot understand how people can say it's either immoral or unethical to walk away from a house. The loan modifications that banks try to shove down your throat are generally shitty deals, they simply want recapitalize all of your late fees and missed payments back into the principle, putting you further underwater. Working out a more equitable deal with the home retention folks is damn near impossible. Not to mention all of the collections calls and come ons from unscrupulous firms that want thousands of dollars to try and work out a deal for you. Walking away is an act of last resort and the financial and credit penalties are there to mitigate it.
So I was stuck with an unrentable home out of state that I could not afford to fix up and could barely afford the mortgage payments on. Therefore I just decided to simply walk away from it.
Given that context, I simply cannot understand how people can say it's either immoral or unethical to walk away from a house. The loan modifications that banks try to shove down your throat are generally shitty deals, they simply want recapitalize all of your late fees and missed payments back into the principle, putting you further underwater. Working out a more equitable deal with the home retention folks is damn near impossible. Not to mention all of the collections calls and come ons from unscrupulous firms that want thousands of dollars to try and work out a deal for you. Walking away is an act of last resort and the financial and credit penalties are there to mitigate it.
> "I simply cannot understand how people can say it's either immoral or unethical to walk away from a house."
It's a social hack, leveraging legacy social behavior.
When loans were primarily between family, friends and neighbors who are not professional businessmen, the social pressure is beneficial to the community. If you took advantage of the lender, the community would be less cooperative in the future.
That no longer being an accurate description of most business deals, individuals are still encouraged to think of legal contracts as being akin to their social/moral 'word' (of honor). This gives an advantage to the businessman who treats it as a legal contract and nothing more.
The individual, once-convinced, will go to great lengths to ensure moral justice, dramatically mitigating the financial risk the businessman agreed to.
e.g. the mark is socially pressured to accept increasingly-onerous terms to try and repay a debt he 'swore' to repay; even though the contract clearly stipulates interest as the price of the businessman's risk in the first place.
Most people just don't realize their tradition is being used against them. The rest are encouraging the stigma because they like being paid interest for one risk level, but actually enjoying a much lower real risk.
See also: credit counseling and debt restructuring as new legal pre-requisites to filing bankruptcy. It dramatically lowered risk of lending, without any commensurate decrease in the cost of borrowing. Yet bankruptcy is still stigmatized as something that only happens to deadbeats and losers. The skyrocketing proportion of bankruptcies due job loss or medical costs are brushed under the rug. The price of interest being the bank's reward for accepting the risk of lending is brushed under the rug.
It's a social hack, leveraging legacy social behavior.
When loans were primarily between family, friends and neighbors who are not professional businessmen, the social pressure is beneficial to the community. If you took advantage of the lender, the community would be less cooperative in the future.
That no longer being an accurate description of most business deals, individuals are still encouraged to think of legal contracts as being akin to their social/moral 'word' (of honor). This gives an advantage to the businessman who treats it as a legal contract and nothing more.
The individual, once-convinced, will go to great lengths to ensure moral justice, dramatically mitigating the financial risk the businessman agreed to.
e.g. the mark is socially pressured to accept increasingly-onerous terms to try and repay a debt he 'swore' to repay; even though the contract clearly stipulates interest as the price of the businessman's risk in the first place.
Most people just don't realize their tradition is being used against them. The rest are encouraging the stigma because they like being paid interest for one risk level, but actually enjoying a much lower real risk.
See also: credit counseling and debt restructuring as new legal pre-requisites to filing bankruptcy. It dramatically lowered risk of lending, without any commensurate decrease in the cost of borrowing. Yet bankruptcy is still stigmatized as something that only happens to deadbeats and losers. The skyrocketing proportion of bankruptcies due job loss or medical costs are brushed under the rug. The price of interest being the bank's reward for accepting the risk of lending is brushed under the rug.
Sure, I agree with all that. What I meant by my statement was that I could not understand how a significant proportion of an otherwise entrepreneurial and libertarian leaning audience could be arguing that default is a moral lapse.
"I simply cannot understand how people can say it's either immoral or unethical to walk away from a house"
You signed a contract. That's what makes it unethical to walk away. You put yourself in the position that you are in. You may think you took a better job offer, but actually if you had considered your circumstances, the job offer was not that great because of the obligation to the mortgage company where you lived for the house that you bought.
You say that you could "barely" afford the mortgage payments which implies that you could afford them. The last paragraph of your response is just a list of excuses to make yourself feel better about the course of action that you have taken. Your part of the problem, not the solution.
You signed a contract. That's what makes it unethical to walk away. You put yourself in the position that you are in. You may think you took a better job offer, but actually if you had considered your circumstances, the job offer was not that great because of the obligation to the mortgage company where you lived for the house that you bought.
You say that you could "barely" afford the mortgage payments which implies that you could afford them. The last paragraph of your response is just a list of excuses to make yourself feel better about the course of action that you have taken. Your part of the problem, not the solution.
The contract carefully outlines what is it to happen in case the borrower finds himself unable to make payments. It is not as if he's stolen the money; he's loosing the property AND the percentage of mortgage payed so far.
The lender is to keep all the cash received so far, and the ownership of the house as well. If the property happens to have been so overpriced that he's loosing money anyway... so bad. They are supposed to be professionals asserting the risk. If they chose to ignore those risk in order to push a deal more attractive to the customer/borrower, guess what, they gambled and they loose!
The lender is to keep all the cash received so far, and the ownership of the house as well. If the property happens to have been so overpriced that he's loosing money anyway... so bad. They are supposed to be professionals asserting the risk. If they chose to ignore those risk in order to push a deal more attractive to the customer/borrower, guess what, they gambled and they loose!
You signed a contract. That's what makes it unethical to walk away.
Is it unethical to cancel a phone contract and pay the ETF?
Your part of the problem, not the solution.
He's helping home prices return to reasonable and affordable levels; I'd call that part of the solution.
Is it unethical to cancel a phone contract and pay the ETF?
Your part of the problem, not the solution.
He's helping home prices return to reasonable and affordable levels; I'd call that part of the solution.
Do you feel that bankruptcy is an unethical process? Perhaps we should bring back debtors prison? After all, miscreants like me put ourselves in this position. Should we not pay for our mistakes through indentured servitude if need be? Perhaps we ought to pass our debts on to our children.
In California, if the loan on the home is a purchase money loan, which is the one used to purchase the home, and not refinanced, then in a foreclosure situation, the banks are not in a position to pursue you for a personal deficiency. In other words, they cannot sue you for the loss on the home. We had our lawyers check this out and it's due to laws dating back to the Depression era.
At the time that a house is sold, there are three parties agreeing to the price: the buyer, the appraiser, and the mortgage lender. So if a home goes down in value, all parties share the risk. It's no different than a VC investing in a small business. If the business fails, the VC cannot sue the managers of the business to get their money back. The same holds true with foreclosures in California. In the depression, this same situation happened, property values fell, people lost their jobs and were sued by the banks to pay them back. Bad stuff.
We are both pursuing short sales of our homes, but are perfectly OK with a foreclosure. In both situations, our credit ratings will take a huge hit, but they recover in 7 years for a foreclosure, and in 2 years if it's a short sale. So we asked ourselves, is our credit score worth 300K? And with some simple financial modeling, we figured that it was about 10 years for the property values to break even. And the trade off was simple.
The short sale does turn into cancelled debt, though, and the IRS will get a 1099-C. Cancelled debt counts as income, which makes it taxable. Except the US govt passed the 2007 mortgage debt relief act, which makes cancelled debt from a mortgage tied to your primary residence an exception. You do not have to pay income tax on it. This is valid through the 2012 calendar year.
At the state tax level, if the home has cancelled debt, it's still seen as a loss sales against the orginal value of the home. And losses are not taxable.
So this is a great situation financially - no liability to the mortgage company, no federal or state tax. Really bad credit for a couple years :(. But as a question of opportunity cost, this seemed to make the most sense.
In order to pursue this, both of us had to stop making all payments on the mortgages. We both got harrassing debt collection calls for awhile, but once you get into the foreclosure process, they eventually die down. We each will get 6-12 months of living in our homes for free, so in some ways that is a loss recovery.
Hope this helps some of you...