Money & Ethics
It's Not Okay to Skip Out on a Mortgage
Default is ethical only for people who can no longer afford their home because of circumstances beyond their control, such as job loss.
By Knight Kiplinger, Editor in Chief, Kiplinger publications
October 2010
- Comments
- Email This Article
- Print This Article
- Order a Reprint
Advertisement
I'm hearing that many home foreclosures are so-called strategic defaults. People who can afford to keep paying are repudiating their mortgage obligations because their property values have fallen, and they don't see them recovering for a long time. Homeowners figure that they can rent a similar house for a lot less than their current mortgage payment. Or they can use other capital they may have to take advantage of depressed prices to buy a similar house for less than their present mortgage balance. What do you think about this?
I'm old-fashioned about contractual obligations, and I think that homeowners (or investors) should continue honoring their mortgage contracts with all the resources at their disposal. Default is an ethical choice only for people who can no longer afford the monthly payment because of circumstances beyond their control, such as job loss or illness -- not high living (past or present) or a speculative hunch that prices would keep soaring. Sadly, millions of people are in the true-hardship category today.
Strategic defaulters are taking advantage of the fact that many mortgages are "nonrecourse loans," meaning that the loan is collateralized only by the property itself, not by any other assets the borrower owns. So if a borrower stops making payments, the lender has no recourse other than to seize the property; the borrower's remaining assets are usually untouchable.
I have heard strategic defaulters argue that they have a higher moral obligation to maintain their family's financial security than honor a debt to a giant mortgage lender. I think this sort of moral relativism is a slippery slope.
On practical grounds, a strategic default could ruin your credit rating for a long time. That could make it very hard for you to rent your next home or, even worse, to get a new mortgage to buy another house at today's lower prices. That's not very strategic thinking. (For more on the financial fallout of a strategic default, see Walking Away From a Mortgage.)
Have a money-and-ethics question you'd like answered in this column? Write to Editor in Chief Knight Kiplinger at ethics@kiplinger.com.
Tags:
Topics:
- Comments
- RSS
Permission to post your comment is assumed when you submit it. The name you provide will be used to identify your post, and NOT your e-mail address. We reserve the right to excerpt or edit any posted comments for clarity, appropriateness, civility, and relevance to the topic.
View our full privacy policy
Reader Comments (9)
Posted by: mark at 09/07/2010 09:36:02 PM
I love to hear you guys yap about walking away from mortgages. First of all, if it wasn't for the banksters and their "If they breath give them a loan" tactics we would not be in the mess we are in now. For the guy that did his homework, put down a heavy downpayment and had no thoughts about defaulting because this was his home for life, then losing his job on top of that...he walks..god bless him,,,let the bank take the hit because they caused this mess. This time its different. Oh and by the way...how come big corporations can walk away from their obligations and thats OK....
Posted by: Tom at 09/08/2010 07:46:53 AM
...the ethics are on the side of the strategic defaulters as they did not create this housing mess. The bankster-gangsters have now done it to themselves -- and now they are reaping the landslide of stargetic defaults they have caused. There will be a literal tsunami of strategic defaults in 2011 as home-slaves, er, I mean homeowners continue to jetison their underwater mortgages one by one. Only a dolt would continue to pay on his mortgage it being tens or hundreds of thousands of dollars underwater. There is no way the housing market will recover to bail out the underwater homeowners. Bye bye underwater mortgage! Hello freedom!! The greateset asset one can have is a low level of debt. People who buy McMansions with their associated jumbo-jumbo mortages are and have been suckers to the lenders. But all of this is changing. The sheeple are finally getting the message.
Posted by: Lisa at 09/08/2010 11:47:52 AM
there is is nothing you can do about it... and besides the ethical, I have to get punished because the market went south? What did I do to make the market go south?... nothing... just made my payments for years.... and I have no equity... all that principal payment..."POOF"...give me back my principal and you (can) have the bricks and mortar...
Posted by: Jack at 09/09/2010 12:31:19 PM
I agree with you as a moral matter, but if you use a moral compass to guide your business dealings you will be playing with a major handicap in today's markets. The counterparty to your mortgage - the bank or other lender - would be sued by shareholders if it put moral obligations above maximizing profits. Sometimes you need to recognize the reality of the market and play by the prevailing rules unless you want other participants to take advantage of you.
Posted by: former homeowner at 09/15/2010 03:58:22 PM
I understand Mr Kiplinger's perspective, but this is an unprecedented situation. If the lenders were working in good faith to assist those who want to keep their properties there might be a better argument for staying but I see no evidence that this the case, and much evidence to the contrary. My former lender quickly re-sold the property and benefited from a nice tax write off . Had it been in their financial interest to work with me, they would have done so.
Posted by: punstress at 09/19/2010 03:11:53 AM
Wha? The strategic defaulters didn't create the housing mess? Who did? You can't point your finger at any one group. Lenders didn't do it alone; they had help from realtors, appraisers, investors, ratings agencies, and, of course, buyers willing to lie on their applications to imprudently buy more house than they could afford. Studies have already shown that the group that lost the most money from this systemic fiasco is the banks, and the groups that gained the most were the borrowers. Yep, it's true. A borrower may have been devastated to have to move, they may have lost their entire down payment (although more than likely they put no money down), but they often also extracted tens or hundreds of thousands of dollars of "equity first, and then lived payment-free for a year or more. None of this could have happened -- read that again -- none of this could have happened without imprudent buyers lying to qualify for more loans than they could repay.
Posted by: AG at 09/19/2010 11:37:36 AM
A mortgage is a business contract with failure modes properly defined. The lender and the borrower enter into it knowing the risks. There are serious risks for both parties. I don't see a moral issue here.
Posted by: jk at 09/20/2010 03:41:35 AM
What about the ethics of driving up property prices by giving loans to house flippers? Lax credit checking and "liar loans" pumped up the bubble market - and it's really not fair to blame only the subprime borrowers, when mortgages take "two to tango". When I was "subprime" there were mortgage brokers trying to put me into mortgages all over the place. You'd go into a RE office, or just peek into the MB office at a mall, or have a coffee at SBUX and some MB was on your d--- trying to get you to buy a house. Fortunately, I knew math and refused to buy or get invovled in their debt driven profiteering schemes. The most ethical thing that people can do is band together to demand either "cram downs" or, at this late stage, a temporary increase in the rental housing market to help reduce rents.
Posted by: Mich at 10/01/2010 09:18:28 AM
"I'm old-fashioned about contractual obligations" Replace old-fashioned with uneducated...