If you feel so strongly about banks being immoral can you imagine insurance companies given free rein?

Whether or not you *think* it was a difficult decision for these people, it just might have been. For someone to lose $150,000 — depending on who you are and your situation, that can be a fair amount of money, or that can be a lot of money. If someone had $150K in bad debt, they would probably be advised to take bankruptcy.

Why aren’t we calling out the financial institutions for their particular role in this? Why aren’t we looking at the whole picture? Sure, it seems contrarywise that someone would not pay when they could afford to, but I’m not sure that’s immoral in this case.

The mortgage contract does, after all, spell out default conditions (which were agreeable to both mortgagor and mortgagee). And, as Bob pointed out, the bank’s proportional risk (as calculated by the actuaries they employ) in extending the loan is figured into the interest rate. It is a business agreement, and the bank is in the business of making money.

Taking a loan from a friend or relative, but then deciding to not repay even when one could afford to do so… I would consider that to be immoral. The friend or relative in this case would have none of the protections inherent in a mortgage contract, and often people do not even charge interest on loans of this type. The loaner here would just give the loan to help someone they care about, not for income or personal gain. The loaner here is not in business, they are granting a personal favor.

I remember reading articles by finance gurus in the late ’90’s, many of which considered sub-prime mortgages to be a predatory lending practice. Predatory lending may not be a *good* business practice, but I believe that it would be considered a business practice. Definitely not a personal favor. Why do we expect an entity which engages in bad business practices to have their karma come back around to them? Why is an individual an awful person if they don’t break any rules (as per the contract), but just don’t behave in the manner that would be most advantageous to another party?

It seems to me that business ethics and the ethics one employs in a personal relationship would differ. If not, then no one would ever offer for someone to enter into a business agreement that was not fair or not a wise choice for an individual. Sub-prime loans would never have existed.

According to business ethics, as long as the person follows the rules laid out in the contract as far as what happens when they default, that is fair. It is not personal, but is just a business decision. The bank is not this person’s friend or family — they owe them nothing more than to follow the rules as agreed to in the contract. The person defaults and the bank takes its lumps. If ‘walking away when you can afford to pay’ becomes a trend, the bank’s actuaries study the data and configure a new risk model, which the bank then uses to determine new interest rates and qualifying criteria for the products they offer. If the behavior becomes quite prevalent and really cuts into their bottom line, they then lobby the politicians (who are supposed to represent us, the ‘little people’) to pass new laws to prohibit behaviors on the part of mortgage consumers.

Now, I know that the focus of this discussion is not on sub-prime borrowers who default, but how can we pick up an apple and tell ourselves that it didn’t fall off of the tree? Why do people assert that an individual in a business agreement should act according to an interpersonal mode of ethics, when it is apparently acceptable for the banks to conduct themselves at all times according to business ethics? If banks can put their interests ahead of any individual’s interests (as long as the rules are spelled out in a contract), why is it so terribly wrong for an individual to put their own interests first in a business agreement, as long as they abide by the provisions laid out in the contract to which both parties agreed?

On the subject of acting on one’s own best interests… I’ll also note that many sub-prime borrowers most likely knew that they probably would have difficulties meeting the loan obligations, and probably should not take the loan. Of the people I have ever spoken to who accepted such a loan, all but one were incredulous that a bank would approve them at all, especially for the amount of the loan they were offered. Most knew that accepting the loan would give them an incredibly narrow margin for financial error in all aspects of their financial lives. But, faced with the opportunity to accept a somewhat questionable loan and the opportunity to realize the dream of owning a home… guess what they did? In this instance of entering into a business relationship and making a business decision, these people figured that the banks knew what they were doing and *did what was best for them.* I don’t see anyone calling out the poor and disadvantaged for trying to pull one over on the banks, for not saying, “I’m sorry, you must have made some mistake. I’m not sure this loan is in your best interests, even though it might fare well enough for me.”

Now, if we want to get into a “what kind of a world are we living in today” kind of discussion… we might have to pick a new topic. There are many morally reprehensible behaviors which people engage in quite frequently (and view as normal and acceptable) that signify a steep decline in the quality of our culture and collective character… much more so than two parties following the terms laid out in a written contract.

I’m okay with people not affording it walking away. But I’m not so sure about those who can afford it walking away?

There is absolutelty nothing unethical or immoral about walking away from your mortgage. You may not agree with it, but it is not unethical because both parties are following ALL the terms of the contract.

A mortgage is a legal contract. Both parties know the obligations, and the repurcussions if the obligations are not met. Default remedies are written into the contract. The penalties for default are spelled out up front.

If you don’t agree with the penalties, tough S**t. Those are the penalties. Don’t like them, don’t sign the agreement.

Besides, don’t you know that the interest rates paid reflect a level of default in them. Rates have default risk baked in. If no one defaulted, rates would be risk free. But they aren’t, so the bank is being compensated for the additional risk by charging everyone more.

Now why do you suppose that is. Because default is an OPTION. Just like paying is an option, so is not paying. Both options are addressed by both parties up front. That is why the Deed of Trust is 20 pages instead of one- Default remedies.

Check your rules about unethical or immoral behavior. Unethical is the borrower being allowed to stay without paying. Unethical is the lender being allowed to foreclose even though the borrower never missed a payment.

Unethical or immoral is when one party DOES NOT adhere to any terms of the contract. That is not the case here. The borrower is simply excercising their option to not pay, and the bank is then excercising their option to reclaim the collateral. That is why there is collateral in the first place. This is a contract-not a favor.

Get off your high horses and understand that this is actually responsible, thought out behavior for some people. Banks do the same thing. Should we foreclose, short sale, or modify. Guess how they come to the decision. They think responsibly about their self interests.

The same thing our example is doing.

LAL, I will be posting my follow up to this post in a few minutes.

Hey, you can’t possibly know how terrible I feel. Walking away is not something I am proud of — I actually feel I’m a victim, too. I must have been quite gullible, swallowing what the lender said. He made it sound so right, and it was so, so easy. He told me the loan was “perfect” for me and would lead to a great profit for my retirement. They did a drive-by appraisal and told me there was no need to verify my employment. They would just take a statement. They assured me I didn’t need to worry about a thing. Sure, I wanted to believe all the hype. I did not stop to wonder what the market might do as I put my savings into the down payment. I did not foresee cancer and unbelievable medical expense ahead. I had bought and sold properties for 15 years, making a little each time, with no problems.

Call me foolish, a deadbeat, someone who should keep on paying till the well runs dry, until I fall over dead at my desk. I did sign for the loan in good faith. I have never missed a payment or even been late…but I can see only two options….walking away with a slim chance of making ends meet as a senior citizen, right now, before every dime is drained from my meager 401k….or, being totally responsible by paying the mortgage each month and going to work each day as long as I can. When I can no longer make it to work, and there’s no check, just social security, maybe I can live in my car and try to survive on welfare. But, wow, I can hold my head high while in the food stamp line….nobody can say I have NOT been responsible. Maybe I am a jerk — but every jerk has a different story. I’m one of the jerks who does feel responsible. I’m one of the jerks who would desperately like to pay for the loan I committed to. There are jerks who just don’t care, don’t really have an investment in the property anyway, and just don’t want to pay. Judge if you will, but please, please don’t slam and degrade, belittle and shame, when each circumstance is different. I’ve looked everywhere for help, for an honorable solution, but I’m going down in defeat. My failure will drag your house value down, too. I wish it could be different. I am truly sorry, but some of us have no options.

In theory you can go after a borrower for a deficiency after foreclosure, in practice that isn’t possible (some states like CA prohibit)

The borrower meets obligations by either paying off the property or surrendering it to the lender.

If I was going to be 50% upside down and the lender would not renegotiate I’d put my money to work elsewhere as well.