There was a time when a man’s word was as good as gold.
Fast forward to today when a good amount of people, including one of my favorite personal finance bloggers, don’t even feel compelled to pay someone back on a home loan worth hundreds of thousands of dollars.
We’re talking about mortgages and how some people are walking away from their homes. Not people who try their best to pay but are unable because of the loss of a job or medical problems. We’re talking about strategic defaulters.
There’s no doubt it can make great financial sense to default on purpose; some people are so underwater on their mortgages that it would save many thousands of dollars a year to walk away and rent a similar place.
But is it “right”? Are you morally justified to walk away from a mortgage?
It is Immoral to Lie
Any time you borrow money from a bank, you sign a contract. In signing that contract you are making a promise to the bank to abide by the terms set forth in the contract.
If you don’t follow those terms, then you lied to the bank by signing that document. Here are a few examples from a mortgage document of the legal jargon that you agree to when you sign a mortgage:
Where you agree to pay back your loan in full if you default on repayment of the loan:
Should any default be made in the payment of any amount due under, or in the performance of any covenant of, this Mortgage then all sums due hereunder shall, at the option of the Lender, without notice, become immediately payable thereafter, although the period above limited for the payment thereof may not have expired, anything to the contrary notwithstanding, and any failure to exercise such option shall not constitute a waiver of the right to exercise the same at any other time with respect to the same default or any subsequent default.
Where you agree to pay back your loan in full if sell the home and/or you stop living there (including eviction):
The Borrower agrees that if all or any part of its interest in the Property is sold, transferred, mortgaged or otherwise conveyed, voluntarily or involuntarily, either while the Borrower is living or upon the death of the Borrower, or the Property ceases for any other reason to be the Borrower’s principal place of residence this act shall be a default and Borrower shall repay the Lender (unless the Lender otherwise agrees in writing not to require repayment) the full amount of the outstanding indebtedness under the [Note][Subsidy]…
Every mortgage has language such as these sections. If you sign a mortgage, you agree to pay back the entire principle of the loan plus interest agreed upon at the time of signing. To say you’ll do this, and then choose not to at a later time, is immoral.
It is Immoral to Steal
If you take out a $300,000 mortgage, I think it’s pretty clear that you owe the bank $300,000 plus interest applied at the rate you agreed upon. If you give the bank any less than that, it means you stole from them. Let’s look at an example.
You take out a mortgage for $300,000 to buy a house today. Now pretend tomorrow your house is only worth $250,000. Some people would argue that you can just stop paying your mortgage and give the house to the bank, and you’re all square, but that doesn’t sound right to me.
If someone lends you $300,000 and you give them a highly illiquid asset worth $250,000, you still owe them $50,000. If you don’t pay them the difference, then you’ve robbed them of $50k. You don’t have a moral right to walk away from an investment just because it didn’t work out for you.
Let’s flip the scenario around. Pretend you borrowed $300,000 to buy a house today and tomorrow it’s worth $350k. Does the bank have a moral right to take the house from you at $300k and sell it to someone else at $350k? Of course not.
When you buy something, even if you borrow money to do it, you have a right to earn a profit. But you also have to take financial responsibility if your investment doesn’t work out and you end up with a loss. To force someone else (the bank in this case) to pay for your investment losses against their will is the definition of stealing.
Two Wrongs Don’t Make a Right
I know what some people are going to say. They will try to justify the immoral behavior.
“The banks screwed us, so now we’re gonna screw them!” or “If they lose enough money, my taxes are just going to bail them out anyway.”
But these are non sequiturs. Whether or not a bank has engaged in immoral business practices and/or has accepted bailout money is irrelevant to the issue at hand: whether or not walking away from a mortgage is immoral. Stealing money from a bank (even one that received bailout money) is stealing, and lying (even on a mortgage contract) is lying.
And (going slightly off topic here) if you are one of those people who thinks people not only can, but SHOULD screw big banks, then you’re a walking contradiction. You hate these banks for screwing people out of money while at the same time you are screwing people (employees and shareholders of that bank) out of money. Taking your business elsewhere is a perfectly moral and rational response to a business you don’t like, but intentionally defaulting and stealing from them makes you just as bad as the big nasty banks.
Truly Defaulting Is Not Immoral, Just Unfortunate
To finish the argument, I’m not suggesting that defaulting on a mortgage despite your best efforts to make payments is immoral. I understand that when faced with the choice of feeding your family or paying your mortgage, you should obviously feed your family.
The key is to put forth a serious effort to pay your obligations. Call the bank and try to renegotiate terms that you can both agree upon. Look into working some overtime or getting another job. Maybe you can rent out a spare room. If you’ve explored every option and still can’t pay your mortgage, then that’s not immoral; it’s just an unfortunate situation and I hope you get back on your feet soon.
What do you think? Do you consider signing a contract and then intentionally not following it lying? Do you consider leaving someone else on the hook for you investment loss stealing? Why or why not?
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
I disagree.
It’s not a moral obligation to pay your mortgage. It’s only a contractual obligation.
The contract states that if you do not pay, the bank takes your house. It’s a simple collateral transaction. OK, maybe not so simple, but it’s a simple business arrangement. Your home is held as collateral in the agreement. It isn’t stealing, it’s a breach of contract. As with any breach, both parties are hurt: you don’t have a home and the bank doesn’t get it’s money.
As for the home price issue, it works both ways, as you correctly pointed out. When you sign a mortgage, you and your lender agree that is the price of the home at that time. There is no guarantee of home price stability. If your home is only worth $250,000 and you bought it for $300,000, well… you still are paying for a $300,000 home. On the flip side, if prices go up, the bank can’t come in and say “hey, that house is now worth $350,000, give me more money”.
When you put something up as collateral, e.g. your house, you and the bank agree that, in this transaction regardless of the market price, the house is enough to satisfy the balance of the loan.
One other situation: If you buy a $300,000 house, have paid off $100,000 of it, and breach the contract and stop paying. You don’t get your $100,000 back, nor do you get your house. Bank walks away with both.
Since these contracts work both ways, there is no moral obligation, there is only a contractual obligation. You breach the contract, you screw the bank, but you also screw yourself (no home, lose all equity).
So it’s clear that you don’t find walking away from a mortgage stealing, but you didn’t address the lying part. Are you suggesting that putting your signature on a document that says you will do one thing, and then doing the complete opposite is not lying, or are you suggesting that lying is not immoral?
I don’t think it’s a lie either. It’s a contractual agreement.
By signing the contract you are saying, I will pay you X amount each month up to the price of the home + interest, in exchange for this house. If I stop paying, I lose all of the equity, and I don’t get the house.
It’s an agreement on both ends. As long as you continue to pay, you get to live in the house and get to own it at the price you agreed on. The bank agrees not to come in and boot you out and keep the equity.
PS… I realize that this is a simplification of the actual mortgage document, but essential that is what the contract says.
This explains exactly how I feel about the deal. The bank agrees to lend knowing that there are two outcomes. In some cases they even make you pay for PMI to protect THEM from making the loan. PMI makes it pretty clear that the bank knows there is downside risk…they know they might have to take the home back if the deal doesn’t work out. If the bank didn’t know this risk existed, they’d never require PMI.
It just doesn’t make sense to me that just because you use the less common way of “repaying” your debt (surrendering your home) you are somehow an immoral person.
Then what DO you consider a moral obligation? Agreeing to something then not doing it…that seems like a straightforward moral issue to me. Yes, you lose your equity, but do you lose the tax deduction you got? Do you lose the months of living in a nice home?
You didn’t agree to rent the place, so thinking of it as a rental agreement where you turn it back over to the bank when you get tired of it, is wrong. Renters pay their rent, get no tax deduction or equity, and go on their way. If they breech the contract by moving out too soon or trashing the place, they owe the owner money for that.
If you lose money in the stock market, do you get to jump out and say, “I want back all the money I put in”? No. There is risk involved with the stock market, just like there is with the housing market. Investors either stay the course until the market rises or get out and accept the loss.
You don’t lose your tax deduction or the months of living in a home because you were paying your mortgage at that time!
People don’t go into a mortgage agreement thinking that they are going to “rent the place” then walk away. There are serious repercussions for breaching that contract. The repercussions in this case are that you lose your home, your credit score is destroyed, you could face legal action, you could face repossession of your property to pay for your debts.
The stock market example doesn’t relate. If you lose money and back out, you don’t get it back. Just like if you walk away from your mortgage, you don’t get your equity back and your credit is trashed. But you actually made my point… investors stay the course, or get out and accept the loss (the only repercussion). So you have 2 choices in a mortgage, stay the course or walk away and accept the many repercussions.
Suffering the consequences of your actions doesn’t make the actions morally justified. We all have a contract with the police that we can commit crimes, but if we do then we have to suffer the consequences of public ridicule and jail or the death penalty. Does serving your time make the crime moral? Absolutely not.
Consequences are a result of immoral behavior; they do not justify immoral behavior.
Your example walks the line of legality vs. morality. These overlap, but are two completely different concepts. Legal actions can be immoral and moral, and vice versa.
I absolutely agree that consequences do not justify immoral behavior, but since I’m saying that it’s not immoral to not pay, that statement doesn’t apply.
Bottom line to my argument is that it’s not stealing nor lying to not pay, it’s simply contractual agreements and consequences, and contractual risks.
PS… this is a great debate. I highly doubt either of us will convince the other, but it’s a timely topic and you make some excellent points.
Weird how these things work out, but I just read an article that had a section to provide a counter argument. This article is about a financial planner who lost his house:
“At first, I dismissed the idea of a short sale. Late that summer, I sat down with a really close friend in Las Vegas, someone I looked up to. He cut to the heart of the matter right away: Why, he wanted to know, were we still making the payments?
Because I have a moral obligation, I said. You pay your debts.
He proceeded to explain that I didn’t have a moral obligation to the bank. I had a moral obligation to my family. I had a contractual obligation to the bank, along with a clear moral obligation to be honest in my dealings. What he was asking was this: Which is more important? Your contractual obligation to the bank or your obligation to your family to preserve your ability to make a living?”
The article is here, it’s a very interesting read: http://www.nytimes.com/2011/11/09/business/how-a-financial-pro-lost-his-house.html?_r=2&pagewanted=all
Note that I’m not agreeing or disagreeing with this. Honestly, I can see where he’s going with that line of thought, but ultimately it doesn’t matter what I say about walking away from a mortgage. It only matters what I would do, and since I’m not in that situation I don’t know.
But I’d like to hear your thoughts on this, does he have a point with putting your moral obligations to your family above your moral obligations to a bank?
My final thought on it: Staying within the limits of the law, as long as you can sleep easy at night…
I think your obligation is to your family first when it comes to putting food on the table and keeping a roof over their heads. If he really felt like his ability to do that was in jeopardy by paying that mortgage, then I believe he’s morally justified in walking away from the payments.
However, I do still think he has a moral obligation to pay back what he owes, even if it takes him a long time.
Agreed!
People need to stop buying things they can’t afford.
They need to pay for the things they decide to buy!
I’m with you. One of my more highly commented on posts was from a year or so ago when I argued the same thing. People will argue that it’s business and that in business, people walk away from contracts all the time. I think that a mortgage goes beyond business. Why? Because it affects those around you, your neighbors, your community (if you pay property taxes, which I’m assuming most stop paying once they decide to abandon their mortgage payments). It’s not just about the banks!
I don’t even care about the fact that it would affect my neighbors. I don’t think I have any obligation to them. I do think I have an obligation to keep my word though.
I totally agree with you. If you promise to do something, do it, even if it hurts.
If we all started breaking promises, work contracts could be torn up if employers don’t feel like paying their staff the agreed rate, insurance companies might not pay out a claim simply because they don’t want to. We couldn’t rely on anyone’s promise anymore.
Yep. I’m sure the people who decide to just stop paying their mortgage would be pretty pissed if their employer just decided to stop paying their salary.
I think the word for an employer deciding to stop paying your salary is called “fired”. Yes, most people who are fired or laid off are pretty pissed.
At least there are some in the younger generation who believe a man’s word is as good as gold.
Well it should be. I don’t know if it is anymore…
As gold prices continue to increase, does that mean my word is worth more?
If so, then Kevin…can I borrow some money? I PROMISE to pay it back! 🙂
(good article and I agree with you. I’m in my 20s, and it’s sad to say that the day has past when your word and a handshake are all that is needed….)
Great topic, I know you’ll get good reactions on both side for this one!
Personally, I disagree. The entire terms of the loan are that you either pay for the mortgage or the bank takes your loan. I think that it is completely a business decision if you choose to not pay the loan.
Every day there are hundreds of businesses which don’t fulfill their end of a contract. In these cases, the terms of the contract determine what happens next. I hear plenty of talk about ‘immoral profiteering’ at business, but it doesn’t really pass muster with me – it’s just a business decision.
I will concede these points to you (since I do have a strong moral compass!):
1) It is immoral to lie to get a mortgage
2) It is immoral to use mechanisms to short circuit the foreclosure process (especially when you know it’s taxpayer money stringing you along). Here I’m thinking about politics, but there are probably some legal tricks you can pull as well.
What’s immoral is that it has become difficult for banks to foreclose. If foreclosures proceeded as they would in normal times it would go a long way towards price stabilization in the home market. I read that only something like 6% of houses turned over in 2010 – that means people are holding homes around 17 years on average… is this ideal?
However, on the topic of strategic default, I have to disagree. I’ve got to go with the business decision on this one, since your loan does pledge the underlying asset (the house and land) as collateral. As long as both sides hold up their end of the bargain, I’m okay with it.
Looking forward to the rest of the comments!
As I’ve said before, the contract says that you will pay in full. It also includes the house as collateral, but that’s a consequence of breaking the terms as opposed to a part of the regular contract.
To me, the language in the contract is very clear, but thanks for providing your input!
I agree but a contract goes two ways. The bank agreed to register their mortgage properly at the county recorder’s office and they agreed to transfer the chain of custody properly if they sold the loan. Now there is a situation that if your mortgage went thru MERS it doesn’t matter if you made every payment on time and paid off your loan you don’t have a clear title on your house. No title insurance agency in their right mind will issue a policy on your house which means you can’t sell it. It’s a two way street.
This was way over my head… I don’t know anything about MERS or titles. But since it sounds smart, you’re probably right! 🙂
The problem here is that you are trying to apply morals to a contract with an amoral entity.
Corporations (such as banks) have two rules:
1) Don’t break the law.
2) Make a profit.
(And then they employ huge legal armies to try to get around the first rule!)
instead of trying to apply “morals” (vague as they are) to this situation, you should be using the same rules they are. It is a contract, and you are entitled to treat the contract in any way possible under the law. If this means you have to break the contract and let them keep the house so you can stay fiscally sane, you are obligated to do that.
If you play with morals and they do not, you are no longer playing the same game. You are no longer on the same level as them, and they will have an advantage over you.
If you were dealing with a person who was also trying to do the “moral” thing (ie, not a sociopath), then it would be different. A corporation is not a person, though, and will not act in any “moral” fashion.
This goes back to where I said two wrongs don’t make a right. If you sell your soul to the devil, you don’t get to just take your soul back because the devil is a bad guy.
No one forces anyone to take out a mortgage. You know the bank might be a bad guy, but you still give them your word, which should bind you to it.
Personally I have to agree that there is a moral obligation to pay for your debts if you are able. Mortgage lenders and any other lender for that matter) did not go into the business of loaning money so that people could choose not to pay it back when it was no longer a convenient contract for them. No one held a gun to your head when you signed up for that mortgage. You were aware of the terms and agreed to them.
That being said, I realize that the bailouts have upset a lot of people and that has become the justification for defaulting on their debts. But just because someone else does it, doesn’t make it right. With this new mentality towards strategically defaulting on debt, we may find that there will no longer be anyone willing to lend money no matter what the circumstances. That could cause liquidity problems for small businesses as well as problems for individuals that need mortgages, car loans, etc. In some ways, it already has.
Yes, a culture of strategic defaults will eventually lead to more onerous penalties for defaults and less availability of credit. And when it happens, people are going to blame the banks instead of the people who are screwing the banks.
I couldn’t disagree more! This is not a morale issue in the least. This is simply a business contract….as you already know money and emotions do not mix, so why are you trying to mix the two? I’d like to address a couple issues I had with the comments provided:
1. Kevin, to try and make a link between criminal activity and defaulting on a mortgage is a bit extremem, but let’s take your argument. In your own words you felt it would not be immorale to default on a loan if you don’t have the means to pay it, but it IS immorale if you do have the means, but decide it is not financialy intelligent to do so. By that reasoning the police should arrest a guy they see using drugs for recreation at a party because it is immorale, but they shouldn’t arrest a drug addict they see because she does drugs because of her difficult childhood therefore it isn’t immorale. (Just illustrating why I think this is a bad example, if you believe something is truly immorale than a persons circumstances shouldn’t change the morality issue.)
2. To the individual who said it affects your neighbors. I can stand to be corrected but I doubt you can write off taxes that are owed to the government…they will get their money! If you’re referring to the fact that foreclosures in your neighborhood effect your house price, well yes that sucks. I’m facing this right now. A house is an investment though, you took a chance that others around you might default on their loans or that the economy might drive the price down. Your neighbors are under no obligation to you to face financial hardship for themselves to ensure that you are ok.
In closing…it is a simple contract that states if you pay you keep the house…if you don’t the bank takes the house back…trashes your credit and you may STILL owe additional money. Does the bank have a moral obligation to a person that had a 400,000 home loan, paid 375,000 on it, but lost their job and now has to default….do you think they would be looking at this from a moral stand point? NO! They would be looking it at it from the contract each party signed (and rightly so).
(SN: I am one of those individuals who are severly underwater on my loan and the bank refuses to work with me because I have never missed a payment. It stinks, but I continue to pay it…not out of moral obligation, but because I value my credit score. I’m working hard to PUNCH MY MORTGAGE IN THE FACE…that’s who got you so fired up isn’t it? lol 😉
With regards to your drug user crime, my personal response would be that both people have a right to destroy their body as much as they want. If it’s up to me, neither drug user is committing a crime. The point I was making is that suffering consequences does not make something moral.
A more appropriate comparison would be murder versus self defense. I don’t think anyone would argue that it is immoral to kill someone who is trying to rob and kill you and your family, but it is immoral to kill someone just for the heck of it. Maybe you see both situations are “murder”, but in my opinion circumstances do matter.
And good for you in keeping up with your mortgage. Whatever your motivation, I think it’s the right thing to do, so congrats! And I do hope your home increases in value and you get above water soon!
Ask CFP Carl Richards what one should do.
I think not paying your mortgage is on the same slippery slope that business accountants use to start cutting quality on the product and taking away benefits from workers. At first, it seems that it’s not a big deal. Other people are doing it. It’s only business. If you want a friend buy a dog. Don’t get emotional about money….etc.
The consequences of people not paying mortgages brought us to this point, but splitting hairs between a contract and a moral obligation to screw the other party leads to unintended societal consequences. I went to lunch recently with an advisor to Bill Clinton (not a senior advisor….the paparazzi would have a field day if that happened). He scared the crap out of me when he mentioned that he thought banking needed more regulation because of the mortgage (and other) problems. We had a huge debate about that fact, because that’s the wrong answer. The only point of his I agreed with was that there will be plenty of people calling for more regulation (and –I argued–higher costs!) as the economy continues to stagnate. More people are going to want the government to do something about it.
Sadly, they probably will.
As a father, I have a moral obligation not to my bank or to society, but to my children. I don’t have to teach them to pay a mortgage, but what it takes to make a smart purchase and keep it. If I have to stop paying on a mortgage, I haven’t failed a bank; I’ve failed them.
Question to you Kevin. Do you own a home? Are you currently 45% underwater on your home? Was the home value propped up in a housing bubble created by the government and banks to generate more income only for the banks to be bailed out and the home owners to be stuck with the debt and the banks to have much reduced risk? Unless you have a horse in the race your opinion is an easy one to defend. Why is it that you aren’t able to decide it is a bad investment and walk away? A contract with the bank has associated risks on both ends and neither side is breaking the contract but simply using a different clause in the contract. In the end the contract is still followed even if you walk away it is not broken. The contract would only be broken if you could somehow keep the home and not pay them but since they will receive the home, they are not being cheated. How is it any different than an NFL team cutting a player who is due their salary? The player won’t be providing the service so the team won’t be paying them. Not all contracts are guaranteed and therefore a business decision can be made.
I couldnt agree with your message more. As a homeowner surrounded by an increasing number of foreclosures and short sales, I feel the drain seeing my home value decrease at no fault of my own. At the same time I often wonder what I would do if I was 100k underwater on my mortgage, Id like to think I would honor it regardless, but it’s hard to say to be honest.
I have mixed feelings about this post.
First, I don’t think I would walk away from my mortgage. I bought responsibly and I am paying back the bank.
With that said, there are people whose homes are worth 50% less. At the same time, those very people no longer have jobs. They need to move to find work, but can’t sell their homes. They’re stuck.
These struggling homeowners couldn’t have predicted the severity of the housing crisis.
My brother’s house in Florida, bought for a low $90,000, is now worth about $30,000. He got one of those adjustable mortgages which were hot at the time, and now his interest rate is well above what everyone else is paying. It is not in his best financial interest to keep chipping away at a $90,000 mortgage on a property that may NEVER be worth $90,000 again. I would walk away in that case. He hasn’t, but he is finally getting some assistance from the bank.
This post comes off a little preachy and raises a couple of questions. Do you even own a house? Have you been laid off and struggled to support a family? Your net worth is quite low for someone with all of the answers.
From a western, generally puritanical, perspective- this may be considered a question of morality. But keep in mind that other cultures, sub-cultures and even the different generational groups (right here in our own country) have different view points on what is moral or immoral. Less than a hundred years ago, it was considered immoral for women to wear pants (and still is for some groups).
Many Asian cultures (and businesses) believe a contract is a contract only while circumstances remain the same, but are considered void if those circumstances change. I wonder if someone from one of those cultures walking away from a mortgage would create a similar discussion?
Something I’ve noticed is that the issue of morality seems to be stronger when we’re talking about large sums of money.
The only difference between seeing your elationship with the bank as moral or contractual is that in one case you are ‘responsible’ and in the other ‘liable’. Defaulting on purpose is in both cases wrong.