On Walking Away
Is it okay to walk away from your mortgage for no other reason than it doesn’t make financial sense to keep throwing your hard-earned money away? There’s no universal answer here, but in most cases, the answer is “Yes.”Importantly, the reason is not that “Wall Street deserves it” or “We’ve got to teach the banks…
By the way, courts have been known (as of late) to dismiss recourse claims by banks when they can show absurd unethical negligence on the part of the bank… i.e., loaning someone $500,000 at 12% when they earn $49,000 a year. Now the house is worth $275,000 and the courts have said, in several cases, Suck on it!
MM – ok but if “morality” was at work – then if a reasonable examination showed 1. You took your obligation to pay seriously 2. your ‘issues’ were short term 3. your ability to pay in the future has a high probability 4. You would be significantly and negatively affected by a foreclosure -> then wouldnt morality dictate that the Bank cut you a break??? (I think it would) BUT I dont think morality is at play in this scenario (I think it is for example in terms of being honest about your income on the application, or not burning down the house if you are underwater – or for the bank to properly record your payments and not try to ‘create’ a foreclosure) – therefore even if the bank “morally” (and possibly even financially) should ‘give you a reprieve….I do not think they are under ANY moral obligation to do so (based on above) – and I am glad that 1. They appear to be financially better off granting you the reprieve a 2. More impressive – they figured OUT that they’d be better off financially by working things out with you.
fsrg — It’s different, not insane. I think the theory in non-recourse jurisdictions is that it is the lender who has the expertise to determine whether the collateral is appropriate, not the borrower for a primary residence (the non-recouse I think only applies to primary residential purposes, not to commercial investments). For example, my understanding is that in California (CMU — where are you? you can probably explain this better than I can…) the borrower actually does not hold the deed, but rather it is the bank that holds the deed in trust for the borrower. If the borrower defaults, then the bank already has title.
What I find surprising is that apparently the interest rates for borrowers are not any higher in non-recourse jurisdictions than others (or at least any differences don’t appear to be caused by the restrictions).
A non-recourse loan and a mortgage are two separate legal contracts, even in states that do not allow recourse loans.
Disgraced liar offering moral advice? Why is anyone paying attention?
fsrg, you are correct. The bank is under no “moral obligation” to cut me a break. Fortunately, they have, due to the vast number of people in the same boat, also due, in part to mistakes made by their industry. I am under no illusions that if this happened under normal circumstances, I would be in deeper poo.
Slopenik — I didn’t say it removed the obligation to PAY. I said it strips away any MORAL and ETHICAL OBLIGATION. That’s a big difference. If you get a loan from a community bank that actually OWNS your loan and is investing in the community, then they are invested in you well beyond the black-and-white text of the contract. Their business depends on a healthy community and a loans that are repaid (not passed along in fractionalized and securitized bundles). In turn, they are obliged to NOT loan you money if the repayment is risky and to be VERY conservative about the value of the collateral.
Then, in turn, if you run into some bumps along the way… they will be more likely to work with you. Find a mutually agreeable solution. Foreclosure may still happen, of course, but it won’t be a surprise.
BUT, in general… you don’t have a moral obligation to pay. You simply have a CONTRACTUAL obligation to pay. And the penalties are prescribed!! You are weighing the penalties against the obligation… and in many cases (because of the loosey goosey way the lenders operated), the borrower simply can’t maintain the payments.
Of course there’s an obligation to pay. BUT it is not moral. It is absolutely an ethical question. But the banks are to exercise some ethics too. And fractionalizing and diffusing your loan around the cosmos doesn’t give them much reason to excise healthy ethics or even good business.
Boerum, I’ve dealt with a lot of cases where debts were sold off to companies that buy the debts and then drag the lendee to court for the $$$. I would always tell them, don’t even bring this to me if you don’t have all the required info for me to make a case for an ‘account stated’ and proof of them being the legal assignee of the debt. It’s unbelievable just how many companies don’t bother to get/retain such information. One would think that banks, with so much money on the line, would be more careful, but I guess they aren’t. I’ve had to b!tch out major companies who purchased debt from the major/popular credit card companies and car dealerships for failing to do just that. Literally millions of dollars lost. And it’s their own fault.
It seems too much is being made here about not honoring contracts. It’s already been said, but to repeat: walkers are not dishonoring the contract. Per the contract, if they don’t pay, the bank takes the house.
Non-payment is something the banks understand can happen with non-zero probability, and to account for it they calibrate the interest rate in the contract and have a contractual claim on the asset (house).