I think it’s probably really easy to judge this situation when you’re sitting comfortably in your 30-year-fixed, with savings and retirement and a steady income. I bet it is pretty easy to get indignant about the situation, people that obviously made bad choices and now are being irresponsible.

How about – for just a second – you get all the details first and then judge. For instance, in my situation: At age 22 I got a very large bonus and instead of blowing it on toys and travel we decided to invest in ourselves and bought a house. We bought the house in 2005 with a 30 year fixed, FHA insured, home loan in the amount of $138,000.00. Today the house is worth $40,000.

Since then we have worked hard to put my husband through school borrowing enough to pay for classes, books and a small portion of living expenses, the loans were well under the maximum amount offered. He graduated with a B.S. in electrical engineering in May 2009.

Since graduating my husband has been applying for jobs all over the country and has yet to get so much as an interview. He is employed at Home Depot, but is unable to get full time hours, so his paycheck is barley enough to cover insurance most months. I have a great job as a legal secretary but it just isn’t enough. We are currently running a $500 deficit each month and we haven’t even started paying back student loans.

So our “bad” choices to date:
A) We followed conventional wisdom at the time and bought a home instead of renting.
B) We got a fixed rate, insured mortgage.
C) My husband went to school for an engineering degree.

This crisis isn’t just hitting the irresponsible and the greedy. It is affecting the hardworking American who made all the right choices and still got whacked by the housing market. We aren’t losing our house because we are worthless slackers who don’t respect the value of personal responsibility. We are losing our home – the home my husband and I have worked hard to maintain and improve, the home I brought my baby boy home to – because times are hard and life is hard. People are crying about how unfair it is that people can walk away from a mortgage without penalty? I think it’s unfair that no matter how hard we try to get ahead we still get our knees cut out from under us.

My point is not that this crisis is all someone else’s fault and I should not shoulder any blame or criticism. My point is that before you start laying a blanket judgment over everyone involved in this mess you should make sure you have all the facts. Was your friend just jumping ship because she didn’t want to pay her loan anymore? Or were there other circumstances she didn’t mention? Life is a whole lot more complicated than an email and a blog post. And this issue specifically goes deeper than a 12 paragraph soap box speech.

Since we have a unethical fractional reserve system with an unethical central bank I think it’s fair that we screw them the same as they screw everyone. They created the housing collapse, and then the Federal Reserve and Government bail them out with our money? That is no where near ethical/fair, and it’s time to change that.

Research this yourself! Get Angry, you should be angry! Demand your Senator/Congress Rep to support Ron Paul’s S 604 and HR 1207 bills to Audit the Fed!

Integrity
Golden/ Platinum Rule
Look in the Mirror

I think these 3 things tell people what they are made of when decisions like these have to be made.
In cases of emergencies, if you are an ethical/integrity/ STAND UP person, you simply.. DO WHATEVER/ BEST YOU CAN to hold up your end of the bargain.
Thats just my opinion.

TA Smith, Creator, Smile-Therapy.com

I agree with the myriad of posts above about the contract between one and the bank being exteremely explicit – the asset(house) is the collateral, and that is what they get if you stop paying – along with your downpayment and all payments to date. They wrote the contract and took the risk just as well as you did.

Just read an interesting article on this at another blog “EconomistsView” where he compared mortgage contracts with option contracts – quite interesting.
http://economistsview.typepad.com/economistsview/2007/12/walking-away-fr.html?cid=126276550#comment-126276550

Anyhow – very good topic.

I find myself in personal debate on this one – as I’m probably 250-300k underwater, but can afford to keep paying. I can hold and may be rightside up to breakeven in say 7 years – but I could buy elsewhere – like down the block (before I walk away – probably have the income to qualify and will have to scrap for the 20% down to do so) and would have several hundred grand in equity, not to mention the value of the the lower mortgage payments invested elsewhere (or put toward prepaying) years from now when things have inflated again.

But I’m just investigating at this time…thanks again for bringing the topic up – when I have a chance I want to read mre of the comments – there are a lot of them!

But, how old are the borrowers? Twelve? They need to take the hits for their past behavior, as well. You choose to act with integrity, or choose to act without integrity. You choose responsible behavior or you choose to be irresponsible. Most of these people knew they were biting off more than they could chew when they signed the papers. Before they walked through the door with the real estate agent. But they bought these houses anyway. Hoping that magically, it would all work out.

We don’t want the government to interfere in many aspects of our private lives (e.g., seat belts, helmet-wear, etc.), but we’re okay with the government bailing us out of our irresponsible mistakes. I don’t want the government to bail these folks out of their poor choosen house purchases.

I’ve made mistakes in my life, and learned from the consequences of those mistakes. If someone bails us out all the time, how do we learn and grow to be productive citizens?

I don’t want my hard-earned tax dollars to be spent in this way. Nor do I want another stimulus give-away. Can you image the good things that could be done with that money?

Regarding “Trouble in Suburban Detroit”, and many people in similar situations, I, too, feel for you. I live in an area that suffered a collapse in our main industry, and was directly affected by it, as well as saw many friends live through it. Plant closure after plant closure and layoff after layoff. Where I live, the state extended unemployment benefits and paid for dislocated workers to return to school or receive other training to move to different careers. I was skeptical, but it panned out. Many people who did not think they would be successful with returning to school, were successful, and now have different jobs. Not all happy endings: some lower pay, one much lower pay, and a couple didn’t make it through school but moved to another job area anyway. Most, however, at least those of whom I’m aware, are doing well. I’d much rather see our tax dollars spent on programs like that. And I am all for helping out people who like “Trouble in Suburban Detroit”, are in trouble through happenings truly not of their own making and out of their control.

An agreement is an agreement. It is up to those entering into the agreement to look at the worst case scenario and ask themselves, can I deal with that? (Unforseen events and trickery excluded.) Were the banks ethical? No.
Were the borrowers responsible? No.
Should we take dollars away from other important areas to pay for it? No.

My personal feeling is that you live up to your ethical code when you can. If you can’t, do what needs to be done and try to do better from there on. No one is perfect, and life does get in your way even when you do your best.

I hope everything works out for you.

In the xbox example, the right thing to do is probably to suck it up and take the loss. Negotiate if you can, but heading over to his house and taking his tv doesn’t really balance the moral scale. Ethics doesn’t really change based on chance or other people’s behavior; it’s always unethical to drive drunk, regardless if the guy you hit (or miss) is too.

First, on your aside, Trent: I agree, it sends a bad message to those helped by the bailout, the financial institutions who lent them the money, and the country as whole. That message: Don’t worry if you make a bad money decision, the governement will bail you out with no (or very few) penalties, and you can go along your merry way. But, what other option is there, really? People don’t live in a vacuum; a glut of new foreclosures on the market will drive down housing prices even more, hurt many financially responsible people, and set up a downward spiral where even more people consider walking out on their mortgages. This intervention isn’t ideal, by any means, but I have yet to hear, on here or elsewhere, a better suggestion of how to deal with this current situation.

(Personally, I’m more upset that this is all being paid for by adding to the national debt, rather than raising taxes and/or cutting other expenditures. The end result of all this deficit spending is just going to be a huge bill that eventually comes due, causing enormous problems for everyone who has to work to help pay it off (i.e., younger tax payers like myself). But, this is getting rather off the top of mortgages and walking out.)

Onto the main issue; when I first read this entry, I was strongly of the view that yes, walking out on a mortgage would be immoral. But after reading the variety of comments and hearing so many different opinions, I’m leaning more towards the amoral; while (usually) not a good idea for a variety of reasons, not the least of which is the credit rating and other potential legal complications, it’s not immoral by most standards.

Let’s tweak your X-Box example to make it a bit more applicable to an actual mortgage agreement. You loan your friend the same $600 under the same repayment terms, only this time spelling out what happens if your friend can’t/won’t continue to repay the loan. Let’s say that the terms are, should your friend default, you take ownership of the X-box 360, the games your friend purchased, and (because, unlike houses, game systems usually depreciate in value over time) enough other game equipment to recoup the amount of the loan and the interested owed by that point.

Now, fast forward three months. Your friend again walks away from the loan, and you take his X-Box 360, the three X-Box 360 games, and several other games to add up to a resale price of $607.50. Now, let me ask you, are you being unethical, enforcing the terms of the contract even though it means you end up taking several video games you never paid for, directly or indirectly through the loan?

Just something to consider.

I don’t think I’m taking it to extremes.

What you’re saying is true but what you’re missing is the agreed-to loan term is a *maximum* term; you can take a shorter time to pay it off but you can’t take longer or you’d be in default. Some fraction of all loans any bank makes will be repaid before their maximum terms. Loan prepayment isn’t considered unethical at all. When I asked my lender for a 10-year loan in hopes of a lower rate, I was told 15 years is the shortest term available and to pay extra principal every month instead. I paid off a 15-year loan in 5.5 years. Are you saying my lender was behaving unethically by telling me to pay extra principal every month?

Re. “if I decide to pay off the loan early and avoid the future interest payments”, you’ve also returned the bank’s principal early so the bank can lend that same money out earlier to another borrower so neither party is hurt by early loan prepayment. The bank might be chagrined if the borrower repays a juicy-interest loan early but that’s part of the business game. It’s sort of the same difference between callable and non-callable bonds; mortgage loans are “early-payable” by borrowers. The bank’s certainly not lost any interest on the money lent for the time it was borrowed. And it got the principal back. If a bank was given the choice between the borrower prepaying the loan or walking away, which choice do you think the bank will make and why?

Perhaps Trent’s friend could/should pay off her loan early instead of walking away?

Taking gr8whyte’s example to the logical extreme doesn’t work.

In other words, as you’ve phrased it, if I decide to pay off the loan early and avoid the future interest payments, then that would be unethical because the bank would be missing out on an income stream. Which is exactly the opposite of everyone’s understanding of ethical finance!

the story doesn’t feel right to me, who would walk away from a house unless they are in dire financial straights. I wonder if she left some information out.

Regardless the real issue is what to do if your seriously under water and can’t make the payments. People aren’t walking away from thier homes because the value has fallen they’re walking away because the y can’t afford it anymore. There is a difference. I suspect she is in the same boat.

When people walk away, the rest of us end up paying the bill with bailouts and other crap. It’s time for some personal responsibility.

That’s pretty much the definition of an ethical dillemma. Will I sacrifice my own best interests to do the ever elusive, “Right thing”?

Ethical behavior doesn’t mean the same thing to everyone, it’s too personal. But the concept of law and community is that we agree to live together under a shared set of rules. These rules hopefully appeal to our ethics. In a less “civilized” time, you would be ostracized or killed for failing to live up to those standards. That’s pretty much the ultimate way of removing an ethical dillema, it swings back towards doing what’s in your best interest. We’ve decided that those behaviors are unethical as a society, so we’ve settled on obscene amounts of legislation as our safety net for morality. This leads to us equating legality with morality, or pretending that ethics has nothing to do with it, it’s juat a “business” decision.

I’m rambling, but as a counter example to the “I don’t think this is an ethical issue as long as your friend is going to accept the consequences” position – what if your child stole candy from the store? Even if your child is willing to accept the consequence for the reward (some time in a police car, some sort of fine, punishment from parents) – is that ethically ok? Or of you take the position that as long as it’s legal it’s ethical? So if you go to another country where it’s illegal to uncover your face, is that suddenly an ethical issue?

I think it’s a matter of opinion (ethics is personal after all) to say that hey, it’s ok to walk out. But I don’t think you can say that it’s just totally amoral. That’s just a copout to say the world is divided into “business” decisions which are completely amoral and “non-business” decisions need to be justified.

Sorry for dragging this on. I’ve got a lot on my mind and this is an excellent distraction.