Mortgage contracts and moral obligation

[30ashopper]

As many Americans begin to realize that it will be many years (if not decades) before their houses are worth what they owe on them, the idea of walking away from your mortgage is going mainstream. Not surprisingly, the mortgage industry is doing everything it can to prevent this, including telling homeowners that they have a "moral obligation" to pay.

But do they?

There's no universal answer here, but in most cases, the answer is "Yes, it's okay to walk away." Importantly, the reason is not that "Wall Street deserves it" or "We've got to teach the banks a lesson" or any of the other retribution logic being thrown around these days. The reason is that you and your lender engaged in an arms-length transaction in which both parties balanced competing interests and spelled out their obligations in a clear, signed contract. And unless that contract states that you have a "moral obligation to pay," you don't have a moral obligation to pay.

You, meanwhile, also made a business decision. You decided to borrow money to buy your house even though it meant risking your equity, home, and credit rating.

And now it turns out that both of you made a bad decision.

Fortunately, you don't have to fight about what happens next. The contract between you spells everything out: If you stop paying, the lender gets the house. That's it. Unless the contract specifically differentiates between a failure to pay based on hardship (involuntary) and a failure to pay based on a collapse in the value of the house (voluntary), there's no difference. If the lender thought at the beginning that you had a "moral obligation to pay," it would have specified that in the contract.

Now, compare this to a situation in which you DO have a moral obligation to pay: When you borrow money from a friend at no interest, for example, and you promise that friend that you will give him or her every penny back. THAT is a moral obligation to pay. In this case, your friend did not lend you money to make a profit. Your friend loaned you money to help you out--with no collateral or contract other than your promise to pay.

yes it's okay to walk away from your mortgage: Tech Ticker, Yahoo! Finance

Interesting stuff from Henry Blodget. The contract states, if you stop paying, the bank gets the house, and that's about it.

 

[grace]

caught some of this on npr last week.

 

[Miss Critter]

caught some of this on npr last week.

Me, too. Intestesting. Here's the transcipt:

ROBERTS: So you are actually advising people to walk away. Why?
Prof. WHITE: Actually, I don't advise people to do anything. Rather, I wrote an academic article in which I made an observation that has been somewhat taboo. And that observation is that to millions of Americans who are underwater would, in fact, be financially better off if they did walk away, just like Morgan Stanley recently walked away from five properties in San Francisco, five buildings which were underwater. Morgan Stanley just gave the properties back to the bank. But most homeowners, or homeowners as a group, don't walk away. They don't strategically default.
And they don't so because of anticipatory shame and guilt and what I believe is an exaggerative fear about the consequences of waking away from a mortgage. And I argue in my paper that these emotions of fear and shame and guilt are cultivated by the government, by the financial industry and, to some extent, the media. And they do this by cultivating a double standard, a standard in which Americans, average Americans are told to have a moral obligation to pay their mortgage and to meet their financial obligations, whereas corporations freely and frequently default when it's in their financial best interest to do so.
And, in fact, they would be obligated to protect the interest of their shareholders and walk away from an underwater mortgage if it was a financially wise decision. And my argument is that this norm asymmetry, the difference in norms between average Americans and banks leads to distributional inequalities whereby average Americans are bearing a disproportionate burden from the housing collapse.
ROBERTS: And if you divorce the decision from guilt and shame and make it purely a financial one, how do you factor in the potential effect on your neighbors' housing prices if there's a foreclosure on their street?
Prof. WHITE: Well, you know, I think that's a relevant concern, and, you know, we should be neighborly and be concerned about our neighbors. But when you're hundreds of thousands of dollars underwater and being concerned about your neighbor means going through your retirement and having no money for retirement or not being able to send your child to college, you have to ask, how much pain is the average person supposed to bear for the good of the rest of the economy? And my point in my article is that it's too much. It's not the responsibility of homeowners. The - for the most part, people who are still in their homes were not people who were speculating. They were not people who bought more than they can afford. They're people who bought houses that they thought were good decisions. As they were being told, was - you should buy a home - they're being told this by the government, by the media. They're being told there's no such thing as a real estate bubble, so they make a decision, and then now they are suffering.

Walking Away From Your Mortgage : NPR

 

[melscuba]

yes it's okay to walk away from your mortgage: Tech Ticker, Yahoo! Finance

Interesting stuff from Henry Blodget. The contract states, if you stop paying, the bank gets the house, and that's about it.

Are we really asking this question??? Legally, I guess it is "o.k.". What sickens me is the thought that everyone gets to walk away from this pretty much scott free and we as the tax payers have to suffer. There are unfortunate consequences to risky decisions for all parties involved. Sometimes it pays off big... other times it doesn't. I've been on both ends of those risks. That is capitalism is it not??? NO.... IT IS NOT O.K. to walk away from your obligations. Doesn't mean it's not the only choice, but we all will suffer from it. There should at least be a sense of moral obligation that goes beyond looking to see if those words are in a contract. Am I morally obligated to raise my kids? feed my family?? clothe them?? Well hell, I can't find it in a contract... must not be important. Take the medicine people. It's gonna taste bad. And p.s., no I'm not sitting pretty over here on my soap box. My medicine tastes bad too.

 

[30ashopper]

What if there are conflicting "moral" obligations? For example, what if paying your inflated option ARM mortgage payment prevents you from putting food on the table for your family?

 

[Lynnie]

What if there are conflicting "moral" obligations? For example, what if paying your inflated option ARM mortgage payment prevents you from putting food on the table for your family?

There are always exceptions. I say it is ok for the true hardship.

 

[ASH]

And I think that there are many who'll base their decision on their current economic position. Take away anyone maybe having to eat dogfood for their retirement and most should agree, there was a moral obligation. I chose a conservative road.....good for me....right now.

Yes, I missed out on opportunity to hit it rich. But I also am not dealing with any poor financial decisions as many are. Should I have to open my wallet to the masses that were being "greedy in my opinion" with their financial decisions?

I don't believe so now nor have I ever thought so.

Would any of you who did call it correct and are on easy street feel any need or "obligation" to open your wallet to pull my conservative arse up just a little higher due to your good fortune......I can hear you laughing even though I don't even have my speakers turned on.

We all make the bed we sleep in. Get comfortable and leave me alone. I didn't make your bed. You did!

 

[Mango]

Since we elected our officials and gave them authority over Fannie Mae, Freddie Mac and countless Oversight Agencies, of which they abused and allowed this mess to occur, one could say they also have the moral authority to make things right. I wonder if Henry Blodgett would be able to tell that to the government when they come looking for his taxes and he doesn't want to pay, for example.

 

[scooterbug44]

Still trying to figure out how if I borrow money from a bank and give them both my verbal and written promise that I will pay them back, I don't have a moral obligation to do so. That sure as hell doesn't fit my definition of moral.

Yes, there are a lot of people having a truly hard time who are making tough choices and losing their homes because of unemployment etc. - I hope they can find a way through this and eventually rebound - but still should have to face the consequences.

But the people who are just defaulting and walking away and using this crappy "moral obligation" argument just outright suck. Just because the banks or some politicians are doing it or made some loophole doesn't make it right.

As another poster said, it's not like everyone else is frolicking in a rose garden right now and all this crap does is make it worse.

I can get behind my tax dollars being used to help people refinance and keep paying mortgages and stay in their PRIMARY and ONLY home, but I'll be damned if my hard earned tax dollars need to go bail out some fat cat or some greedy idiot.

 

[Hop]

there is no free lunch...someone always has to pay.