Mortgage contracts and moral obligation

caught some of this on npr last week.

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

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.

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?

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.

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!

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.

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.

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

Government propping up bubbles by paying off mortgages is a separate issue - we institute that policy when we vote. In a perfect world, someone walking away from a ballooning option arm only impacts two entities, the borrower, and the lender.

Some banks are getting judgments against short-sellers for the difference between the mortgage amount and sales price - why would they not do the same thing if you walk away?

What IS the effect of walking away? It's not "nothing"; I assume it will blow up your credit rating and prevent you from buying a house again for the next 7 years. Is this not true?

Won't it effectively prevent you from even renting a home, if there's a credit check?

Some banks are getting judgments against short-sellers for the difference between the mortgage amount and sales price - why would they not do the same thing if you walk away?

What IS the effect of walking away? It's not "nothing"; I assume it will blow up your credit rating and prevent you from buying a house again for the next 7 years. Is this not true?

Won't it effectively prevent you from even renting a home, if there's a credit check?

Yes, that's true. A Deficiency Judgment is what you are talking about on a short sale. Before this bubble, if someone experienced a true hardship and their home went into foreclosure, it annihilated their credit and with older underwriting guidelines did prevent them from buying another home for several years. The guidelines had been loosened and if someone defaulted and their home ultimately was foreclosed, they could buy another home in 13 mos. With some subprime lenders, they could buy a home prior to being discharged in bankruptcy!

We look at trends and rarely is there a full recovery in 13 mos. US Bankruptcy Court was designed to protect debtors in true harship. I think if there is a hardship, a foreclosure and bankruptcy can help the person get back on their feet. Keep in mind, we are talking the basic foreclosure, not one in an environment where the gov't just propped up the largest corporations in the nation due to an economic dowturn.

For true hardship, should the laws be changed? Not everyone in this environment is in foreclosure due to greed. I see walking away much different than a hardship.

And, through all of this mess, I hope our lenders and borrowers have learned a lesson. ;-)

I know people who are walking away from their mortgage just because the government bailed out banks and other businesses and they want their bail out; and since the bank is the one that gave them the loan when they couldn't afford it then it's the banks fault.

When they applied for the loan they knew it would be a stretch to afford the home but they were greedy & wanted to keep up with "the Jones".

They are the same people who have decided to not pay credit cards because they want a bailout. Even though they knowingly charged the items with intent to pay, but decided they deserved to not pay...

Kind of sad...

Government propping up bubbles by paying off mortgages is a separate issue - we institute that policy when we vote. In a perfect world, someone walking away from a ballooning option arm only impacts two entities, the borrower, and the lender.

I think we all know that this isn't a perfect world and that walking away impacts many more than just those 2 parties.

And SO WHAT if your house is worth less - it is a HOUSE! It is supposed to provide you with shelter, not bars of gold.

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.

it is illogical to keep feeding a losing transaction if there are legal alternatives. i believe you are morally obligated to navigate your family out of financial stupidity.

Some banks are getting judgments against short-sellers for the difference between the mortgage amount and sales price - why would they not do the same thing if you walk away?

What IS the effect of walking away? It's not "nothing"; I assume it will blow up your credit rating and prevent you from buying a house again for the next 7 years. Is this not true?

Won't it effectively prevent you from even renting a home, if there's a credit check?

From what I've read, it'll knock about 250 points off your FICO. From there you'll have to start a rebuild process. They remain on your report for seven years, just like tax liens. This doesn't prevent you from buying in that seven year period, but you'll likely be discouraged from doing so due to they types of loans / interest rates you'll be restricted too.

it is illogical to keep feeding a losing transaction if there are legal alternatives. i believe you are morally obligated to navigate your family out of financial stupidity.

I think a fellow poster stated something to effect of "So what if your house is worth less?" It is still providing shelter. That is my point. It may not be the house of your dreams (or maybe it is). At best it is failing to appreciate, at worst, it's worth less than when you bought it. It doesn't mean it's o.k. to walk and leave the bank hanging, which our government has decided leaves me hanging, not only with my house, but now with this one. I did state it doesn't mean it's not the only choice, but it is one with consequences... or at least it should be for more than just Joe Taxpayer. The "financial stupidity" took over when the house was purchased to begin with (from both bank and buyer). Outside of just saying these people were "stupid", let's just say they gambled and lost. There is moral obligation there.

Let's start with the assumption that both buyer and lender made errors in judgment.

What is the moral obligation of the lender? I understand that there is an obligation to the shareholders to minimize the loss, but remember, all of these organizations operate under a federal or state charter that grants them special privileges, and that, after all, the buyer is a customer of theirs (even if it is a fifth- or sixth-hand transaction).

Does the lender have a moral obligation in any way?

Discuss.

Wow! Two hundred and fifty points is a lot! It does take a while to recover from that. Currently, with only vanilla loan programs, no loans for 36 mos. post foreclosure AND bankruptcy. No questions, no exceptions.

I know two people are in this situation due to the economy. They weren't greedy and didn't overbuy, but had to make financial decisions and leave one home to move to an area with better pay, etc. They haven't missed any payments, but both are chattering about 'walking away.' Both have the same philosophy, "I won't need any credit for at least five years and I have to look out for my retirement."

I do believe this will be the next wave of foreclosures, which are those in the higher income brackets who are just tired of the situation and in this due to no fault of their own. They are more concerned about recovery and what makes financial sense, thinking of their own retirement so they won't be a burden on tax payers in 20-30 years.

There are many sides to this coin. Definitely not a one size fits all.

Wow! Two hundred and fifty points is a lot! It does take a while to recover from that. Currently, with only vanilla loan programs, no loans for 36 mos. post foreclosure AND bankruptcy. No questions, no exceptions.

I would LOVE to hear someone explain to me why someone who gets foreclosed upon/declares bankruptcy should be able to buy a house or get a loan within 3 years.

I sure as hail don't think they should be able to.

I would LOVE to hear someone explain to me why someone who gets foreclosed upon/declares bankruptcy should be able to buy a house or get a loan within 3 years.

I sure as hail don't think they should be able to.

Because mortgage brokers gotta eat too, ya know.

So why can't they just pay their grocery bills w/ decent loan risks?

So why can't they just pay their grocery bills w/ decent loan risks?

Oh, that's so old economy.

I shouldn't really blame the brokers, SOMEBODY at the actual lender had to approve these pieces of doo-doo.

I would LOVE to hear someone explain to me why someone who gets foreclosed upon/declares bankruptcy should be able to buy a house or get a loan within 3 years.

I sure as hail don't think they should be able to.

Ditto. You can ask the now defunct hedge funds and go back to fannie/freddie to inquire why guidelines were relaxed.

Because mortgage brokers gotta eat too, ya know.

Brokers are a thing of the past.

Basically I feel that there was a monumental amount of stupidity and poor financial planning at many levels/locations and I want there to BE SEVERE CONSEQUENCES so that we don't just keep repeating the same mistakes.

There needs to be some major fiscal biatch slapping and accountability and I just don't feel like we are getting anything but excuses and more enabling.