Is It Wrong To Walk Away From an Underwater Mortgage?
There was an interesting article in the New York Times this week based on a study showing that a higher percentage of mortgages over $1 million is delinquent than that of smaller loans. Some of the conclusions reached may be debatable, but it got me thinking about strategic default, which our friend Wikipedia defines as “the decision by a borrower to stop making payments on a debt despite having the financial ability to make the payments”. The NYT article asserts those in higher income brackets are more likely to see strategic default as a wise business decision, while Joe Sixpack continues to make the payments on his underwater mortgage. Is that really the case? And if so, who is right?
Google “strategic default” and you’ll get almost 11,000 results, including a recent 60 Minutes segment on the topic. It’s definitely a controversial subject–some say choosing to walk away from a home when you can afford to make the payments is unethical, while others think it’s strictly business and the banks have it coming since they got us in this mess to begin with. I see both sides of the argument, though after reading a lot about the subject this week I’m leaning towards thinking maybe there’s nothing wrong with a homeowner making the same kind of business decision a bank or corporation wouldn’t hesitate to make faced with a similar situation. Back in January Roger Lowenstein argued the case for strategic default in The New York Times Magazine, and he made some pretty good points:
“Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.”
If you buy into the argument that it was the irresponsible and greedy behavior of the banks that brought about the housing bubble and corresponding bust, then maybe it’s fair that they’re left holding the bag. It’s a tough question with no easy answer. What do you think?
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Tags: strategic default, underwater
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BlogbytheBay
Is It Wrong To Walk Away From an Underwater Mortgage? http://bit.ly/a0BDLT
This comment was originally posted on Twitter
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kim
I love how you say that the higher income tax bracket sees it as a wise business decision. Of course no one wants it on their record but I see so many “uninformed” people who are too stubborn to even consider walking away from their home while the mortgage is causing incredible stress leading to health, family and marriage problems. I wish more people would consider this as an option. I’d love to see less physical and emotional stress & more saved marriages. Is it more ethical to stick to your commitment to a bank than to commit to your own well being?
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Bill Lublin
The situation you discuss is not without it’s challenges, but when you sign a mortgage and note (which are the loan documents used in my commonwealth) , the mortgage is the pledge of the property for repayment of the debt, and the note is your personal promise to repay the debt.
Though I cannot understand the stress experienced by the defaulting borrower, the actions of the lender don’t relieve them of the moral obligation to repay their debt.
In fact as I write, I’m starting to feel strongly enough about it to write my own post . If I do I will stop back and provide you with a link. -
Ginger Wilcox
There are some people who are getting foreclosed on because of life circumstances beyond their control, a lost job, a sick family member etc. That is an altogether different circumstance than a strategic default.
What George is referencing here with strategic defaults are not people who can’t pay afford to pay their mortgage payments every month but people who can pay it and choose not to pay because it will benefit them financially.
Perhaps I am altruistic but I have always believed that if you take on a debt, you pay it back. I sold my house this year at a price that I would never have expected to sell it for. It stinks, but that is how life goes. Some investments are good, some are bad. Foreclosures can have a dramatic, long term negative impact on communities. As human beings, I believe we have some commitment to our community, which is why we abide by laws, volunteer, give to our schools, etc.
For me personally, I would have a very hard time walking away from a commitment that I understood the ramifications of before I took it on.
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Sorry it took so long. If you wish, you can see my opinion on this at http://rereflections.com/2010/07/11/is-your-moral-compass-broken/
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George Crowe
Bill and Ginger, I’m with you in an abstract moral sense, but things are rarely black and white in real life. I think it’s one thing to argue the ethics of something like strategic default in general, and probably often very different and more complex in many cases for people who actually have to make the hard decisions in doing what’s best for their families.
Of course in the case, as Bill writes in his blog, of “a member of the privileged class who has a loan that they don’t want to pay because the thing they bought went down in value”, I agree in that scenario it’s hard to defend.
Good discussion.
George
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