Is walking away from your home mortgage a viloation of 1-d?

newsuper wrote:Strange thread. Aren’t you boardmembers supposed to also be some sort of forum moderators here on AF? If so I think you need to delete a few of your own posts Black Swan. Both you and burk85 need to have a beer together and talk about something less touchy, like abortion or politics.
Obviously this is Chad’s call about what is approriate and we should probably work out some guidelines. I though Black Swan was getting pretty close to the limits of civil conversation up there with some of his comments, but nothing really offended me all that much. I agree with the previous poster that finance is pretty cut-throat and you pretty much have to be able to take someone calling you an idiot from time to time.
I call people idiots on other websites all the time….
 
Consider that you sign a mortgage contract that is exactly similar to the one you would sign today, but with an additional line that says something to the effect of “The borrower may discharge or reorganize this debt as prescribed by the rules of Private Market Bankruptcy and Foreclosure Code”. This means that implicit in the agreement of the contract is a method to walk away from or re-organize the debt under certain circumstances. So you would not be breaking any kind of contract. Now just remember that the Federal Bankruptcy code and a state’s foreclosure process is effectively implicit in every contract and there really is no difference.
You might say that, oh well, if you walk away from a mortgage, then you’re “able” to pay, whereas in the other cases you’re not “able” to pay. Well that ONLY matters if ability to pay is part of the foreclosure/bankruptcy law or mortgage contract. To the extent that ability to pay is not included in the foreclosure law, it does not matter as to whether there is an ethical violation.
Suffice it to say, if walking away from a mortgage is a violation of ethics, then any debt default is too. And so is bankruptcy.
 
jmh530 wrote:Suffice it to say, if walking away from a mortgage is a violation of ethics, then any debt default is too. And so is bankruptcy.
That about sums it up.
 
“if walking away from a mortgage is a violation of ethics, then any debt default is too. And so is bankruptcy” is just not true.
Walking away from a mortgage, debt default, and bankruptcy harm other people and that’s pretty much the basis for calling them unethical. However, in most ethical codes the prohibition against hurting others is not absolute. There are almost always reasons that you can harm other people ethically - to save another person from harm, to spare yourself from disproportionate harm, to punish someone for some other ethical transgression.
There is this ethical code being put forth here that lenders voluntarily accept the risk of default and thus hurting them has no ethical consequences. I just do not think that is the contract between lenders and borrowers. It is also a rather cheesy way of getting around an ethical issue by saying that ethical rules simply dont apply to lenders because they have tacitly opted out of any status as victims.
I think most people make loans with the idea that the borrower will endure some really significant pain to pay back the loan. However, at some point there have to be limits on the pain of the borrower as the ethical consequences of further harm to the borrower outweight the harm that would be caused to the lender. Nobody is expected to sell a kidney to make a mortgage payment. Good character says that a borrower should work as hard as he is reasonably able to do, forego expensive purchases, sell valuable assets, and similar to pay the mortgage.
That means that every debt default can have a different ethical interpretation. Did the borrower take on enough pain to avoid causing harm to the lender? A person who just says that it is inconvenient for him to pay his credit card bill or home mortgage and he’s just not going to do it has some ethical problems - he has caused harm to another person simply because he didn’t want to inconveience himself. A person who has become completely disabled and thus is unable to pay the mortgage is an entirely different story - there is no ethical issue here because the person simply can’t avoid causing harm to the lender. In between, reasonable people can disagree about what is an ethical default and what is not. It’s just silly to group all defaults together and say that if one kind of default is unethical then all defaults are unethical.
 
JoeyDVivre wrote:newsuper wrote:Strange thread. Aren’t you boardmembers supposed to also be some sort of forum moderators here on AF? If so I think you need to delete a few of your own posts Black Swan. Both you and burk85 need to have a beer together and talk about something less touchy, like abortion or politics.
Obviously this is Chad’s call about what is approriate and we should probably work out some guidelines. I though Black Swan was getting pretty close to the limits of civil conversation up there with some of his comments, but nothing really offended me all that much. I agree with the previous poster that finance is pretty cut-throat and you pretty much have to be able to take someone calling you an idiot from time to time.
I call people idiots on other websites all the time….
Sure, perhaps deleting threads is a bit unneccesary, but name calling is pretty lowbrow. You can still have a robust discussion without calling someone else who disagrees with you ‘stupid’. Anyway, it was just a bit weird how it sort of flared up outta nothing. Enough from me.
 
I personally was not offended, more frustrated someone was trying to draw me into an argument instead of a discussion. I will admit my opening opinion was sarcastic and strongly voiced, however I actually was just answering the question posed. If I personally think walking away from a mortgage is unethical, then ipso facto I would also have to hold that someone who disagrees is unethical. This should not have been a shocking revelation, nor should it have been taken personally.
I will admit I misread BlackSwan’s banruptcy analogy and I see his point (I tend to speed read while at work). The wording threw me off because BlackSwan was referring to the distribution of loss in bankruptcy instead of value. Which I have never seen referred to that way. Loss is a “negative space” idea really, you can not attribute loss before knowing value. So you can not practically “take equity loss to 0, and then start attributing loss to debt holders.” You start attributing value by seniority starting with debt holders until there is none left.
I still don’t think it holds as a good example. The functions of debt and equity are different, unless you combine them to produce leverage which you do when you purchase a house. The only way the analogy works I believe is if it is a privately held company so the debtors and equity holders are the same entity. In this case if the company (equity owner) owns a building purchased with debt that drops significantly in value, absolutely the bank will not only take the building if they default but also require them to pay the full amount of the loan by liquidating company equity. The company will be on the hook for the shortfall in collateral, not the lender. (Obviously many residential loans are non-recourse so this won’t happen. Which is another reason why the comparison does not work.) This goes to my original point of why selling your (unleveraged) equity is not the same as walking away from a mortgage.
So walking away from a mortgage is much more like refusing to post collateral when your margin account moves in the wrong direction.
 
Sweep the Leg wrote:jmh530 wrote:Suffice it to say, if walking away from a mortgage is a violation of ethics, then any debt default is too. And so is bankruptcy.
That about sums it up.
I would echo that I agree its not a CFAI ethical violation as defined by the code, but I agree with JoeyD. In general ethics is about intent not civil or criminal law and the same action can be both ethical and unethical in different situations. I have the legal right to shoot someone in my house, it could be argued whether its ethical for me to shoot him in the back as he tries to flee. Same action response as if he entered my bedroom with a knife as defined by the “make my day” law, but different ethical implications.
 
I can’t stand philosophical conversations. It’s no more unethical to walk away from a mortgage than it is for an NFL team to cut a player that’s under contract.
But, if you’d like to devolve into a philosophical rub-and-tug, let’s start the old fashioned way. Define ethics.
Never mind. I got bored just writing that.
 
Sweep the Leg wrote:I can’t stand philosophical conversations. It’s no more unethical to walk away from a mortgage than it is for an NFL team to cut a player that’s under contract.
That one doesn’t really work that well because NFL contracts aren’t guaranteed and everybody knows it going into it.
 
I don’t see any problem with it. The penalties to your credit for walking away are pretty severe, so the home value has to be really underwater for it to make sense. If the bank is worried about people walking away, then maybe they should be more careful with their lending.
 
I believe that walking away from the house is unethical even though it is a wise financial decision. If you borrow money from a bank and promise to repay that money, why should the promise be conditional on the value of the house?
 
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