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re: Re It's "immoral" to strategically default on one's mortgage
Posted on 12/13/11 at 11:23 pm to Tiger JJ
Posted on 12/13/11 at 11:23 pm to Tiger JJ
This thread has been really enlightening. I can't believe all of the people that have issues with this presumed "moral obligation" for a collateralized loan.
I work in various relationships bound by contracts, joint ventures, etc. Each are governed by very specific set of parameters spelled out in the joint venture contract. Companies have the right to back out of the arrangement or to exercise various rights. "Fair" is not a relevant word when the agreement is spelled out and a party exercises their rights. That's why each of these points is discussed and negotiated in the contract, or alternatively some industry standard guidelines are adopted. It's business - if you don't like it, don't sign the contract. Be upfront and play by the rules, but protect your rights and assets as provided for in the contract. Your stakeholders (shareholders, company, family, etc.) should expect nothing less. Nor am I offended when other parties in the contracts and ventures defend their stakeholders in a similar manner.
Why is personal finance any different? Although I have never defaulted on any debt, I can understand and would encourage somebody in dire straits to do so. If the bank doesn't like it, they should provide themselves much more of a cushion by lending much less than the initial collateral value (while factoring in recourse/non-recourse in that state with associated costs and likelihood). Would there have been as much of a housing bubble if the banks had applied that common sense (ignoring FHA/Fannie/Freddie, of course)?
I work in various relationships bound by contracts, joint ventures, etc. Each are governed by very specific set of parameters spelled out in the joint venture contract. Companies have the right to back out of the arrangement or to exercise various rights. "Fair" is not a relevant word when the agreement is spelled out and a party exercises their rights. That's why each of these points is discussed and negotiated in the contract, or alternatively some industry standard guidelines are adopted. It's business - if you don't like it, don't sign the contract. Be upfront and play by the rules, but protect your rights and assets as provided for in the contract. Your stakeholders (shareholders, company, family, etc.) should expect nothing less. Nor am I offended when other parties in the contracts and ventures defend their stakeholders in a similar manner.
Why is personal finance any different? Although I have never defaulted on any debt, I can understand and would encourage somebody in dire straits to do so. If the bank doesn't like it, they should provide themselves much more of a cushion by lending much less than the initial collateral value (while factoring in recourse/non-recourse in that state with associated costs and likelihood). Would there have been as much of a housing bubble if the banks had applied that common sense (ignoring FHA/Fannie/Freddie, of course)?
3
Posted on 12/14/11 at 12:36 am to Tiger JJ
i would default in a heartbeat if it would help me
Posted on 12/14/11 at 10:13 am to Bayou Tiger
(no message)
This post was edited on 1/5/12 at 2:48 pm
Posted on 12/14/11 at 10:46 am to LSURussian
Let's change the hypo a little. Say you buy a long term CD with a bank when interest rates are very low. The CD has some fixed early withdrawal penalty, which is set out in the contract. A couple of years later, interest rates have shot up and your CD is now losing money in real terms. You do the math and realize you'd be better of paying the early withdrawal penalty, taking the money out, and buying a CD at a different bank that's offering much higher interest rates. Would that be inethical?
I think there are a lot of similarities between this and the home default. In both cases you're making a decision in your best interests, against the bank's best interests (they'd love to keep paying you the 1% CD), and you're 'breaking' a contract, albeit one with a clearly delineated penalty provision in favor of the bank. Yet they feel very different. I wouldn't blink twice at the idea of changing out CDs. I would be much more hesitant to walk away from a house, although I certainly would if circumstances demanded.
Some of this is because the consequences are worse for defaulting; you don't get your credit smashed if you break a CD. But I think it goes deeper than that.
I think there are a lot of similarities between this and the home default. In both cases you're making a decision in your best interests, against the bank's best interests (they'd love to keep paying you the 1% CD), and you're 'breaking' a contract, albeit one with a clearly delineated penalty provision in favor of the bank. Yet they feel very different. I wouldn't blink twice at the idea of changing out CDs. I would be much more hesitant to walk away from a house, although I certainly would if circumstances demanded.
Some of this is because the consequences are worse for defaulting; you don't get your credit smashed if you break a CD. But I think it goes deeper than that.
Posted on 12/14/11 at 11:01 am to Cold Cous Cous
quote:
I think there are a lot of similarities between this and the home default. In both cases you're making a decision in your best interests, against the bank's best interests (they'd love to keep paying you the 1% CD), and you're 'breaking' a contract, albeit one with a clearly delineated penalty provision in favor of the bank. Yet they feel very different. I wouldn't blink twice at the idea of changing out CDs. I would be much more hesitant to walk away from a house, although I certainly would if circumstances demanded.
You've hit the nail on the head. Mortgages come with several implied options "free" for the borrower. One of them is a prepayment option. Another is the option to default.
Posted on 12/14/11 at 11:09 am to Bayou Tiger
The original post compared strategic default on a collateralized obligation to declaring bankruptcy as a method to strategically default on non-ollateralized obligations. Going back to American Airlines and its bankruptcy, the question that I ask myself is what causes the least harm? Running American Airlines into the ground does not benefit anyone. It just delays the pain. If the company can be saved, then the damage to all parties can be reduced. The issue is how to spread the pain equitably.
Posted on 12/14/11 at 11:10 am to Tiger JJ
quote:
Undocumented income/liars loans and rogue mortgage lenders. There are many people being prosecuted in this area for mortgage fraud and I am not talking about bank employee lenders. The govt is more interested in pursuing this than securities fraud.
while this may be true, it is a HUGE problem and is only growing as the bad times continue
Posted on 12/14/11 at 11:30 am to Poodlebrain
quote:
the question that I ask myself is what causes the least harm?
So you believe individual actions should be judged on what causes the least collective harm?
quote:
Running American Airlines into the ground does not benefit anyone.
I'd say it benefits the creditors that continue to get paid in the interim.
quote:
It just delays the pain. If the company can be saved, then the damage to all parties can be reduced. The issue is how to spread the pain equitably.
As mentioned earlier in this thread, it doesn't seem like the "least harm" is having a taxpaying citizen trapped in a negative equity situation, greatly reducing his labor mobility and increasing the stress on him and his family.
Posted on 12/14/11 at 12:01 pm to Bayou Tiger
As I said earlier in this thread, I see both sides. But, this is not a complex concept, and yall are getting too detailed in your analysis.
At a basic human simple level, the right thing to do when you borrow money (no matter how much), is to pay it back in full. I think many of you are diving too deep into the contracs, complexities, collateral discussion, and details. Which is fine, but that's not what the OP asked you to do.
Moral vs Immoral is not a complex question, and does not need a complex analysis IMO.
Borrow money....Pay it Back. Period. If you don't do that, you've "gotten away with one" regardless of if you did it legally or not. If you don't pay back in full (regardless if the collateral covers the debt or not), then you have harmed someone else. That aint right. I don't care what the contract calls for, hurting someone else financially isn't right.
There are two different discussions going on:
1) Contractually-speaking, is it ok to walk away from your mortgage? The answer here is yes.
2) Ethically-speaking, is it ok to walk away from your mortgage? The answer here is no.
At a basic human simple level, the right thing to do when you borrow money (no matter how much), is to pay it back in full. I think many of you are diving too deep into the contracs, complexities, collateral discussion, and details. Which is fine, but that's not what the OP asked you to do.
Moral vs Immoral is not a complex question, and does not need a complex analysis IMO.
Borrow money....Pay it Back. Period. If you don't do that, you've "gotten away with one" regardless of if you did it legally or not. If you don't pay back in full (regardless if the collateral covers the debt or not), then you have harmed someone else. That aint right. I don't care what the contract calls for, hurting someone else financially isn't right.
There are two different discussions going on:
1) Contractually-speaking, is it ok to walk away from your mortgage? The answer here is yes.
2) Ethically-speaking, is it ok to walk away from your mortgage? The answer here is no.
This post was edited on 12/14/11 at 12:21 pm
Posted on 12/14/11 at 12:05 pm to Tiger JJ
quote:
So you believe individual actions should be judged on what causes the least collective harm?
Isn't that one of the fundamental concepts of ethics - the idea that you owe a duty not to needlessly cause harm to others?
Posted on 12/14/11 at 12:11 pm to Cold Cous Cous
quote:
Isn't that one of the fundamental concepts of ethics - the idea that you owe a duty not to needlessly cause harm to others?
Who said anything about "needless"?
Posted on 12/14/11 at 12:22 pm to Poodlebrain
quote:
Going back to American Airlines and its bankruptcy, the question that I ask myself is what causes the least harm? Running American Airlines into the ground does not benefit anyone. It just delays the pain. If the company can be saved, then the damage to all parties can be reduced. The issue is how to spread the pain equitably.
One thing not touched on in the corporate BR scenario is pension obligations, which often are transferred to the PBGC, which is funded by companies with ongoing pension plans. The non-BR employers will have to pay higher contributions to the PBGC in the future and the PBGC is underfunded as is. Waiting for it to ask for a bailout in the future.
Posted on 12/14/11 at 12:24 pm to tirebiter
quote:
One thing not touched on in the corporate BR scenario is pension obligations, which often are transferred to the PBGC, which is funded by companies with ongoing pension plans. The non-BR employers will have to pay higher contributions to the PBGC in the future and the PBGC is underfunded as is. Waiting for it to ask for a bailout in the future.
Presumably they are paying current on their premiums to the PBCG?
Posted on 12/14/11 at 2:04 pm to Shankopotomus
You think nodoc/liar loans have gotten MORE prevalent since the bubble? For real?
Posted on 12/14/11 at 2:07 pm to JPLSU1981
quote:
There are two different discussions going on:
1) Contractually-speaking, is it ok to walk away from your mortgage? The answer here is yes.
2) Ethically-speaking, is it ok to walk away from your mortgage? The answer here is no.
So that's a moral yes, but an ethical no.
Posted on 12/14/11 at 2:38 pm to Tiger JJ
quote:
As mentioned earlier in this thread, it doesn't seem like the "least harm" is having a taxpaying citizen trapped in a negative equity situation, greatly reducing his labor mobility and increasing the stress on him and his family.
That's what makes it difficult to judge the actions of those who elect to default. There are clear cut cases where default is the right thing to do. There are also cases when it is clearly unnecessary. The difficult cases are those with unique circumstances that are only known to person making the decision. How can you judge them when youo do not know their motivation?
Posted on 12/14/11 at 2:44 pm to Poodlebrain
quote:
That's what makes it difficult to judge the actions of those who elect to default. There are clear cut cases where default is the right thing to do. There are also cases when it is clearly unnecessary. The difficult cases are those with unique circumstances that are only known to person making the decision. How can you judge them when youo do not know their motivation?
Well, this is your standard not mine. I don't judge anyone operating within the confines of a very specific, negotiated legal agreement as being somehow morally/ethically deficient. Again, I insist on honesty. But I do not insist on self-immolation (to a BANK of all things) as some ethical/moral higher ground.
I'd really like to see someone take a stab at the CD hypothetical.
Posted on 12/14/11 at 3:11 pm to kfizzle85
no, thats not what I meant. What I meant was the prosecution and discovery of the fraud practices is becoming more prevalent and as the FBI gets better at tracking them down it will help to see how deep this problem really was during the "bubble".....
Obviously I wasn't referring directly to those loan products.
Obviously I wasn't referring directly to those loan products.
Posted on 12/14/11 at 3:32 pm to Shankopotomus
Sorry, wasn't obvious to me. 
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