Is It Ethical to Walk Out on a Mortgage?

I may have just ruined a friendship from my college years by being honest.

A few days ago, I received a long email from a friend I keep in occasional email contact with. That friend, who I’ll call Lindsay, is in an upside down mortgage – the current estimated value of the house is about 10% less than the amount still owed in the mortgage, and that difference is enough for a large down payment on a similar house in Iowa.

Anyway, Lindsay asked me how the housing market was in Iowa, since she was planning on moving back to the area with her family. I gave her my thoughts (pretty stable with some small growth in the “big” areas near Des Moines and Iowa City) and expressed some surprise that she was considering moving back.

In response, she flat-out told me that she was going to walk away from her mortgage. Instead of getting a mortgage for a house here in Iowa, she was going to pay for it all in cash (by cashing in some stock options), then walking away and handing the bank the keys to the house.

I wrote her back, told her my opinion on the move, and haven’t heard from her since.

In a nutshell, I feel that walking away from a mortgage is horribly unethical. While there might be a solid financial argument for doing so right now, it’s a complete act of bad faith, one that, as a borrower, you would never dream of accepting from a lender.

Let’s just translate it quickly into different terms. Let’s say you want an XBox 360 game console and a few games, but you don’t have the cash to pay for it. You agree to borrow $600 from your friend and you’ll pay that friend back $30 a month for 24 months to cover the cost. Three months in, you’ve defeated Halo 3, Orange Box, and Bioshock and have decided you’re tired of the console, so you announce to your friend, “I’m tired of paying you. Here’s the console and the games. They’re used. Oh well.” and walk away.

Or, you can reverse the equation. Let’s say you’re in an area where the home values are skyrocketing. You have a fairly new mortgage, but have built equity in your home. The bank decides, “Hey, we can cash in,” and then boots you from your home, regardless of whether you’ve paid the bill on time or not.

In short, any time you agree to borrow or lend from someone else, part of the assumption is good faith. Both partners believe that the other will operate in good faith to go forward with the borrowing agreement. From my perspective, walking away is not good faith.

Not only that, it’s also financially stupid when you start looking at the big picture. It drops an atom bomb on your credit for at least seven years, during which you’re going to be forking out a lot more for every type of insurance and also have horrible rates on things like car loans and so on – and don’t even think of trying to get another mortgage for a long time.

Another thing to consider: at some point, the market will rebound, and it’s already down 20% or so (depending on where you’re at). Whatever happened to “buy low, sell high”? Right now, you’re selling low – or at the very least, selling nowhere near the high. That’s just not solid investing – that’s the equivalent of buying a stock, watching it plunge 20%, then selling it immediately because it’s “bad” even though the same solid fundamentals exist.

A third factor: you’re probably walking away because you’re in an adjustable rate mortgage that’s either recently adjusted or about to adjust. The government is about to bail you out. Take a look at the Dodd-Shelby HOPE for Homeowners Act, among other things. Uncle Sam is going to step in and keep you safe from your own financial mis-steps.

An aside about the housing bailout: I really feel like the bailout is sending the wrong message to homeowners. Take me, for example. In 2007, I could have signed up for an ARM at a very, very low introductory rate, borrowing roughly twice as much as we did for a home. Instead, I looked at our finances, ran the numbers, was realistic and honest, and got a fixed rate mortgage that I knew I could afford. One year later, the government is bailing out the people who didn’t bother to do the homework and doing nothing to help the responsible people who made a well-considered choice. I understand that some families are in need, but it also sends a message that irresponsibility will be protected by the government.

In short, I’m not a fan of walking away from a mortgage. In the big scheme of things, it barely makes financial sense, and it certainly raises some big ethical flags. From my perspective, it’s not something worth doing. I’d love to hear your perspective.

Here are some additional thoughts on walking away from mortgages.
Why Not Just Walk Away from a Home? (@ npr)
New Attitude: It’s OK to Walk Away from a Mortgage (@ wall street journal)

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216 thoughts on “Is It Ethical to Walk Out on a Mortgage?

  1. Sam says:

    Hi Trent,

    Understand that it is unethical…but what if you’re really broke? Is there a work-around in that situation?

    Regards,
    Sam

  2. jb says:

    Financial hardship aside (which clearly isn’t the case here), I agree completely — the move is highly unethical. Furthermore, I can’t imagine she wouldn’t get sued for what she would still owe.

    I also agree that the Federal government bailout is just a bad idea. If I thought the government would pay my bill if I bought I house I couldn’t afford, I might have done that too! (Ethical questions aside.)

  3. Eh, I don’t see how it’s any less ethical than a short sale.

    In a short sale, you say, well, the XBox is only worth $300 now. How about I give you that, and we call it even?

    If you walk away, they can (and do) sue you for the shortfall and get everything you owe.

  4. Sam says:

    That’s absurd. What was the purchase price? On a 300k house, you’re talking about walking away for 30k?

    At least try for a short sale. Or wrap the 30k up in the new house.

    It’s just such a small amount of money to be walking away from. You can have that paid off quite quickly if you work hard at it.

  5. I must say that at first when I read this title I thought that it could be pretty cool to just walk away from a mortgage. I mean aren’t banks unethical taking all your money away from you with home loans and especially credit card debt.

    But the way you fut it like a friends xbox makes me completely re-think the situation. Do you get a bad credit rating by walking away from the mortgage? Do you go bankrupt?
    What are some strategies of things to do when your house is actually worth less than your mortgage and how you can get out of the situation without losing too much money. Any tips would be great.
    I can’t afford a house yet as I am a struggling entrepreneur but one day in the future I will.
    Thanks for the post

  6. Louie says:

    Trent i think you arnt really taking a moment to walk in Lindsey’s moccasins. As the son of a mother who fell upon hard times, i can see how easy it is for something to spiral out of control for an individual who had worked very hard to keep/purchase what they had. Now it is another thing that Lindsey is going to purchase another home in cash, and why she wouldnt just pay off the home she has, wait it out and sell it via her stock option is beyond me but im assuming she has kids/family and is doing the move for peace of mind and like many people was probably offended via your piece of mind. people that make mistakes generally know the properties of the mistakes they are making and i know a lot of times it isnt appreciated when someone sticks my nose in it as if i didnt know what was going on.
    i love the blog and your advice, but try to be understanding and not an authority on the issue and dont lose a friendship over something like this.

  7. BNelson says:

    Why is it unethical?

    The borrower and the lender both signed a good number of pages several times stating with in significant detail exactly how the loan should be repaid and what forms of recourse are allowed the lender in the case of default. The loan document is almost always provided by the lender and written by the lender’s lawyers protecting the lender well above the borrower. If that document states that the recourse available to the lender is the seizure of the collateral (the property for which the loan was made in most cases) and reporting the default to credit bureaus — then that is exactly the recourse to which both parties agreed.

    Lending money, even a mortgage, is not a risk-free investment. If it was intended to be risk-free then the interest rate should be a heck of a lot less. The lender accepts a portion of the risk in extending loans. It is unethical that the borrower who is already paying a premium to accept the risk of the real-estate investment has to shoulder 100% of the risk as well as pay a premium to do it.

    What is unethical is that Banks, commercial enterprises, can make record profits for a decade using deposits on which they paid a horrible rate and tax-payer funds. Yet, now they can’t handle the inevitable risk side of the investment. Sounds like these banks should have “banked” a bit more of those outsize profits that any reasonable person expected would likely be offset sometime in the future by outsize losses; it is just the way investing works.

  8. Randy says:

    Simply put, it’s not ethical. When you signed the mortgage contract, you bound yourself to the terms of the agreement.

    Rationally, I understand why people might walk away from a mortgage, but that doesn’t make it ethically acceptable to do so.

    Randy

  9. Kristen B says:

    I completely agree with your permission. It is not a good idea to walk away just because it is a “bad deal.” Ultimately it is the responsibility of the buyer to evaluate the loan when they purchase it, and once you agree to the terms, no matter how unreasonable they may be, you have agreed to them. Period.

    We made a bad loan decision in 2005 and have been tempted to just walk away. Our financial situation in the short term would be much better, but as you said the long term would be toasted! Plus the ethical factor is the highest consideration, in my opinion. If you don’t have personal integrity, then nothing else matters. Your word is your bond, even when it is not convenient.

    Thank you for standing up for an unpopular idea.

  10. Kaitlin says:

    Just thought i would share my thoughts. My friend from work bought a home during 2005 in Florida. At a time when homes were drastically over-valued. Her husband just got a new job and they want to move. There home is worth about 100,000 less right now. When they went to talk to their mortgage company, i won’t say which one, two different people instructed them to get approved for another mortgage and just walk away from the old mortgage. When my friend told me this i couldn’t believe it, they are just trying to worsen the mortgage crisis. Thankfully my friend has decided to rent their home and pay the difference instead of walking away entirely. That doesn’t mean i haven’t heard many complaints about how unfair it is that they can’t afford a new home. I’m kind of on rant right now but i think it is ridiculous that people complain about a situation they got themselves in.

  11. Kristen B says:

    Hey trent, could you change the word permission in my comment to position. I don’t know what my brain was doing!

  12. paula d. says:

    Not only is what she’s considering doing unethical, but where’s the personal responsibility?

    Once again, I’m seeing how, if you don’t want to deal with something difficult, you can just walk away as a solution.

    Invariably, it comes back to bite you in the a**, in the form of bad credit for years!

    I totally agree with you Trent. Plus, it’s just bad Karma.

  13. Melmar70 says:

    I understand that foreclosures do unfortunately happen when people lose a job, become seriously ill, etc. However I agree that it is highly unethical to walk away from a mortgage that you are able to pay simply because the property has lost value. I think there should be serious penalties for someone who just decides that they are going to dump the property on the bank, not due to hardship. That will only make the housing crisis we are currently experiencing even worse. This mindset is apparently becoming a trend, which is really a sad statement on the moral condition of this country. Where will we be if more & more people adopt this attitude?

  14. Joe says:

    It may not be ethical but it is not unfair to the lender – lenders price the likelihood of such events occuring into the rates that each borrower is offered.

  15. Holly says:

    I agree that there are certainly people who knowingly got in over their heads with mortgages. However, I think that some people are naive, like myself, and assumed that there was some oversight of the mortgage industry to prevent them from offer loans with unethical options, like a pre-payment penalty. I am educated and consider myself knowledgeable but I don’t think anyone can know everything about how the financial industry and markets work. There is an element of personal responsibility but in my opinion, there is a responsibility on the part of the government to either 1. educate the populous on financial matters and/or 2. prevent companies from coming up with products that they know full well could harm their customers. We don’t allow drug companies to sell drugs that are known to cause harm so why do we let mortgage companies sell products that do?

  16. J. Money says:

    I totally agree – It’s def. unethical, regardless of whether it’s financially smart or not. Sure some circumstances may fall into a gray area, but if you’re gonna bail out because you no longer “like it”, that’s just pathetic.

    To be honest, I think a lot of people these days are just plain lazy when it comes to solving problems. They’d rather cop out and take the easy route, regardless of it’s consequences.

  17. geoff says:

    Walking away from an upside down mortgage appears to becoming a trend.

    UNDERSTAND THAT SUCH AN ACTION WILL IMPACT YOUR CREDIT SCORE AND ABILITY TO OBTAIN FUTURE LOANS.

    Fannie Mae and Fredie Mae both have guidelines in place that penalize this practice for up to 7 years. Even after that they will look for a sizable down-payment and a FICO of 680 plus.

    Fair Isaac the FICO developer, notes that walking away is a major event similar to bankruptcy. WITH NEGATIVE CONSEQUENCES FOR ALL LOANS, INSURANCE AND EMPLOYMENT.

    Before anyone goes down this path, look at all the alternatives!

  18. Debora says:

    Though I agree that everyone has a personal responsability, we must not forget that your friend is not the only one with responsability for this situation. I do not live in the USA, but from what I’ve heard banks in the USA have massively given high mortgages to people they knew could not afford it, just to make some money.
    In your XBox360 example: if I borrow that money to a friend knowing he’ll most likely not be able to pay me the 30 dollars a month, than I feel I do share a responsibility for that situation.

  19. Rob says:

    I don’t know that I agree. A moral obligation to a banking institution? I don’t know that any bank has made a loan based on a moral contract. You default on the loan, forfeit the property, take the hit on your credit. That’s the way it works. Call me cynical, but when you talk of a borrower “dream of accepting” bad faith behavior from a lender… It doesn’t seem to me that borrowers are ever really in position to hold lenders accountable one way or the other… Lenders take a calculated risk. As do borrowers. If you’re willing to pay the consequences, I honestly don’t see the problem.

  20. E.T.Cook says:

    Bravo. I have never understood the nonchalant attitude that people have regarding their financial obligations. Not paying your credit card bills is just commonplace now, and “to be expected”. No one seems to be embarrassed about their terrible credit anymore.

    We definitely are a nation that has lost its individual accountability.

  21. Jesse says:

    I would argue that the situation is amoral.

    Breaking a contract you signed with a company is different then breaking an agreement you had with a friend.

    A contract is simple. You know what’s expected of you and you (should) know the consequences of failing to meet those expectations. It’s not personal.

    Breaking an agreement with a friend introduces a lot more issues. Hurt feelings, etc.

  22. brainy says:

    I’ve got a friend who has done the same thing recently. Walk away while moving into a nicer place… All I can do is shake my head at how wrong it is.

    Some just don’t see the mortgage agreement as a, well, two-sided agreement.

    I hadn’t thought of the role reversal with the bank like you have — maybe next time the sore subject comes up, I’ll use that example to try to explain what I mean…

  23. Robert Barr says:

    You are much better off to have her not respond. To play “jingle mail” when you are broke sucks, but when you have the cash to buy another home and you just stick it to the bank, you are a bad person.

    Good for you for speaking your mind!

  24. CP says:

    Trent,

    When we purchased our house, we looked for houses within our budget so that we could afford our fixed monthly mortgage payments. Being quite conservative and expecting to stay in this house for the long-term, we would not have looked for a mortgage that lowers the monthly payments temporarily (interest only, adjustable rate, longer terms). Some of the problems today are a result of market conditions, as well as the use of these temporary mortgage features along with “liberal” lending practices.

    The problem I have with the situation you have described as well as others is how should the burden of problem (lack of equity, rising payments, etc.) be shared between the homeowners and the lending institutions? For as many instances similar to the one you describe (that appears to be a person willing to abandon their obligation because it is convenient for them), there are others where the homeowner may have been fooled by the lending institution, appraisers, etc. into believing the mortgage was affordable and the housing market is a win-only proposition. In this second scenario, one can certainly argue that the homeowner should have known better, but all of the greedy other parties were stacking the deck in their favor to ensure that they could make their $ (fees, commissions, etc.).

  25. Jill says:

    Amen. It is unethical and people who made poor decisions should not be bailed out as it penalized the responsible among us.

  26. Diane says:

    My husband’s aunt owned a home in a very trashy neighborhood in Cleveland.The house was built in 1895 and was falling apart around them. Some genius at the mortgage company made her a loan (she’d already filed bankruptcy 3 other times) for the total value of the house, $40,000 and then she quit paying the mortgage. She took several trips to Vegas and Atlantic City and bought a new Cadillac. The home was foreclosed on and she moved to a nice suburb where she was able to purchase a NEW home with financing for low income people. It is beautiful! My husband and I are scratching our heads over how this is even possible.

  27. Johanna says:

    I will say first of all that it really annoys me that all these concessions are being made to home”owners” who took out loans they can’t pay back for houses they couldn’t afford.

    However, as much as it pains me to say it, if your friend had a non-recourse loan, then I don’t think ethics has anything to do with it. She’s just playing within the rules of how non-recourse loans work: If the borrower defaults, the lender can seize the collateral (the house), but can’t seize any other assets from the borrower to make up the balance of the loan. As I understand it, this is written into the terms of the loan, so the lender knew (or should have known) what they were getting into. So in that case, the only relevant question for your friend is “Is voluntary default a good deal for me?” That is, does the benefit of not having to pay back the loan outweigh the cost of the hit to her credit score? If it doesn’t, then obviously your friend is acting foolishly. But if it does, then the lender was acting foolishly by issuing a loan for which voluntary default could be the best course of action.

    On the other hand, if she had a recourse loan but is hiding other assets to prevent them from being seized, or if she qualified for the loan under false pretenses, then there are certainly ethical issues there. (The cases where lenders instructed borrowers to provide false information about their income and assets are a gray area – I think that there, both parties acted both foolishly and unethically.)

  28. Matt says:

    The leniency in bankruptcy laws, and the lack of ethics in people, has allowed this housing crisis to happen. Banks have been eating up profits for years when housing was good, people paid on time, etc. Builders made out like bandits from the housing bubble. And homeowners made out from low ARMs and living off equity. Now, when times aren’t good, people cash out their ethics and take the easy road — banks take away perfect-paying mortgagor equity lines, builders drop everything and run to different states, and buyers walk from properties. Of course the housing market is going to crash when no one is responsible for their commitments!
    My fiance’ and I are in the process of buying a new house. We purchased it very early, signed the closing contract a year later, and have saved everything we’ve made so that we could afford both places in case the house we’re in now doesn’t sell. And it hasn’t. And we’re not walking. We’ll deal with two payments until it ever does sell, because it was our CHOICE to do what we did. Only in very rare circumstances (illness, no family, job loss, etc) does walking away from a mortgage make any sense, and it’s still wrong. You shouldn’t be living paycheck to paycheck in the first place. I know it can be argued that some people don’t have a choice, but the amount of people that fall into this category are VERY small.
    I agree with you, Trent. Especially when only talking about people that aren’t in serious financial trouble, walking from a house is just plain wrong, irresponsible and selfish.
    It’s like those people on the expressway going 45-50 instead of the posted 70mph, or those that go 100mph… or those people who ride the merge lane all the way until the end and cause mindnumbing traffic for EVERYONE. Stop caring about only yourself!!

  29. Jeremy says:

    Wasn’t it unethical for the mortgage company to give her a mortgage on a home that was way overvalued in the first place. It also sounds as though it was zero-down as well. “barely makes financial sense”? If the house was $500,000 and she’s 10% upside-down then it make perfect financial sense to me.

  30. SP says:

    I think it is somewhat unethical, but isn’t it allowed by terms of the loan? I also think a lot of unethical stuff went on in the housing market over the last several years, from wall street, to brokers, to NINA (no income, no assets) loans. It has been a mess.

    People walking away is part of the risk the bank took on. By not being careful with who they lend money to, they are stuck holding the bag in this situation.

    “The american dream” of home ownership and all the tax perks of owning encouraged many people to buy houses that really just couldn’t afford it yet. I’m not talking people who just bought giant houses–I’m saying someone like me, who couldn’t even afford the cheapest house in town (L.A. area), jumping into a mortgage just because I was “throwing my money away” renting.

    Sorry for the rant. It isn’t that the “little people” like your friend are blameless, but people seem to condemn them more quickly than the giant faceless banks.

  31. Matt says:

    I hate banks, SP :)

  32. Jeremy says:

    The lender is no less at fault for loaning against a value that was based on thin air. The loan is also written that a buyer may walk away with the bank getting the house as collateral.

    Your friend, if she is in a once hot market, could see the price of her home plummet by a lot more in the coming years.

    The analogy to the stock is wrong, because with the stock, you have to take the loss no matter what (unless you want to hold on and hope for it to go back up). With 0 down and being underwater with a house, the only thing that gets hit is your credit score.

    Another thing is that the money for the loan shouldn’t have existed in the first place – it was created out of fractional reserve banking, which means the money didn’t exist before the loan. The last thing the bank should ethically be doing is collecting interest out of money created out of thin air, but that is exactly what they do in the vast majority of cases.

    My bet is if your friend tried to sell, she would discover that the ‘market price’ is not 10% but 20% or 30% what she paid for the home. Even if she could afford that kind of hit, it wouldn’t be worth it from a purely financial analysis, bad credit be darned. (after all, she could take that money ‘saved’ and go buy a car outright, or pay off her credit cards, etc, etc)

    This walkaway phenomenon has just begun. As the ALT-A resets hit from 2009 until the end of 2011 and prices begin to return to their long term fundamental values (a multiple of income or rental income), walking away from one’s mortgage will become more and more common. Whether it’s moral or not it’s coming.

    If you think it is immoral, realize that the only way to stamp out this and the many other forms of the financial pillaging of America is to do away with fractional reserve banking, the privately owned Federal Reserve, and go back to sound money, which is the foundation of a sound & moral country & people.

    “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”

    - Woodrow Wilson

    “The bold effort the present (central) bank had made to control the government … are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it.”

    - Andrew Jackson

    “Banking establishments are more dangerous than standing armies.”

    - Thomas Jefferson

    “All the perplexities, confusion and distress in America arise not from defects in their Constitution or Confederation, nor from want of honor or virtue, so much as downright ignorance of the nature of coin, credit, and circulation.”

    - John Adams

  33. MoneyBlogga says:

    Trent, I read your blog every day and, from reading it, I know that YOU know that not everyone is as financially savvy as yourself. When you took on a mortgage, you did it the right way IMO. I wish that I had done the same. I didn’t and I’m living the situation that you describe above – killer ARMs.

    I’m not walking away from my commitments but I AM trying to make those commitments workable because it’s the only and best thing that I can do. I cannot conjure up $8K for a monthly mortgage payment even if I wanted to. Who granted me that dumb mortgage?? On to the lenders. Like it or not, the lenders are the gatekeepers of the financial system and they knowingly gambled the US economy on the backs of subprime borrowers. ‘Subprime’ is just a fancy way of describing a person who doesn’t pay their bills on time, a category that I fit into myself just over a year ago. That didn’t stop the lender I worked with from taking my pulse and giving me hundreds of thousands of dollars in loans to buy properties I shouldn’t have been allowed to buy. That same lender had a fiduciary duty to save ME from myself, let alone the investors whose money I was playing with, but they chose to give me a slice of that $12trillion pie that was looking for “low risk, high return”. Ha. Good luck with that.

    Is it ethical to walk away from a mortgage? Probably not. It doesn’t feel good, not to me anyway, which is why I’m steadily working things out. A huge amount of responsibility still lies with the lenders who allowed illegal immigrant strawberry pickers to take on a $700k mortgage on a 7 bed 4 bath McMansion.

    Personal responsibility is all well and good but, let’s face it, the average american is knee deep in debt with a pitiful grasp on personal finance. So MANY of us didn’t even receive the basics on financial education when we were still living at home because our parents were even more ignorant than we are today. Combine that with “weeeee-heeeee!!” lending and it’s no surprise that there are 4 foreclosures right next to me on my single street alone.

    If it comes right down to it in the end and I have to make a choice between worrying myself sick over a mortgage that I have no hope of repaying, I will be reversing that moving truck up the driveway. I’m not there yet.

  34. Tana says:

    First of all, you don’t just walk out on a mortgage. They will come after you and get everything they can from you.

    I actually know someone who is planning to walk away from a mortgage in the near future, but the circumstances are quite different. Last fall, there was a divorce. One of them lived in the house until it sold, while they both continued to make the payment (neither of them could do it alone). The house sold in the spring, was off the market waiting to close (in 60 days), the buyer’s had to postpone the closing date a few weeks, then ultimately the buyers were unable to get financing. Someone, somewhere, never should have let those people “buy” the house. Either the realtor didn’t do due diligence to make sure the buyer was qualified to buy such a home, or some banker told them they could get a loan when they couldn’t. Ultimately, the couple selling the home can no longer make the payments because they both now have other housing, which means the house will be foreclosed on.

    Another case of banks offering people things they never should accept. The problem is on both sides. I know there are cases where it’s one way more than the other – either the buyer or the bank is more at fault – but unless I know the details (which I don’t usually try to find out), I don’t feel sorry for the buyer or the bank. It’s one thing to mean well, it’s another to take unnecessary risk.

  35. Mike says:

    I hope your friend already has a job in Iowa. Many companies will run a credit report as part of a background check. Not only will her rates on all of her credit cards go up, she might not be able to get a job.

  36. Darin says:

    Trent,

    The way I see it your friend ask you for some information, you wrote back, she divulged her personal goings-on, but she may not have been asking for your feedback, only sharing.

    When your friend wrote you back telling you what she was going to do, did she ask for you opinion?

    Getting married, buying/selling/walking away from a house, having a kid – these are MAJOR life decisions. Please consider the possibility that you had Trent “The Simple Dollar” hat on; maybe a different hat was more appropriate.

  37. Misch says:

    Serious financial hardship aside where you were FORCED to walk away, a contract is a contract is a contract. Don’t sign one if you’re not prepared to have the integrity to stand behind it.

  38. Stacey says:

    I agree – where is the personal responsibility?

    We carefully gauged our income and expenses before deciding on a price range for our home. But now everyone who went out and bought a house they couldn’t afford is being rewarded by government bailouts, or simply cutting their losses by walking away from an upside down mortgage.

    In my opinion, this will just further the lack of personal responsibility we are seeing in this country. And each time the media writes a story about the “increase in walk outs,” more people will decide that it is okay.

  39. momof4 says:

    How can your friend just walk away from a mortgage, and buy another house with cash ( did I read that correctly)? I should hope that the mortgage co would go after her for every cent. 5 years ago my husband and I watched many of the people we know buying giant homes well beyond their means. we were scratching our heads, thinking everyone else must make a boatload of cash compared to our income. Watching my friends and neighbors walk away from their mortgages while at the same time taking vacations, over spending on handbags, cars etc with no means to pay for it totally ticks me off. I know that in the end it will negatively affect my family, even though we’ve always been responsible with our finances. We have a moral obligation to our community to payback what we borrow, even if it means beans and rice for dinner and an extra job at mcdonalds.

  40. James says:

    No it isn’t ethical, nor is it an easy out. The bank can still come after her for what is owed (plus a lot more, when they sell it on the cheap, expenses, etc.) Whether they will or not…who knows.

  41. Jay says:

    I agree with you completely on your aside, BTW. In my opinion, all the bailout does is – effectively – mortgage our future (at a steep interest rate) to avoid some short-term pain. It’s mainly being done as political grandstanding.

    There’s no denying that a foreclosure, or filing for bankruptcy, sucks. Bad. I hope and pray I never have to deal with either. But I had friends who had to do the latter, and found themselves able to buy a much bigger, nicer home five years later. I had family who did the former and were able to get into a a great bargain of a house with payments they could more easily afford which was worth far more than they had to pay for it, putting them into a nice equity position. It’s not the end of the world in either case.

  42. Gretchen says:

    I don’t totally agree with your position on walking away from mortgages but I definitely disagree with your friend about not writing you back. You simply aired your opinion, which she ought to have seen coming anyway, and she should reply respectfully as I am sure your initial email was. I am tired of people who aren’t able to have a reasonable disagreement and talk it out or agree to disagree and get on with the friendship! There, rant over.

  43. Mary Beth says:

    I am with those agreeing that it is totally unethical to walk out on a contract. Forget what is the financially smart move, some things are just WRONG. I find the government efforts to bail out the current mortgage crisis personally offensive. I know that there are some people who were genuinely lied to, etc. but the vast majority dug their own holes and it should be up to them to get themselves back out. Homeownership is a priviledge, not a right and the constant trading up for bigger and better is just crazy in my opinion. Those of us that bought a moderate home, that we could afford and are paying down our mortages instead of leveraging the equity should not have to foot the bill (via our taxes etc.) for those who foolishly chose to do otherwise. I have a friend who has been in foreclosure 3 times in the past 4 years. Each time they manage to secure another mortage with yet a higher interest rate. Even though I consider her a friend, I do not feel in any way sorry for her situation because it is totally self created. She and her husband both have decent paying jobs but not, apparently, well paying enough to support the life style they feel they “deserve”. I avoid the topic of finances with her because I would probably go on a rant about the fact that her kids “deserve” not to have the financial stress in their lives that she and her husband continue to create. If you are in foreclosure and just manage to escape (for the third time) what are you doing eating out every week, buying expensive christmas presents, designer label clothes and birthday parties “out” at fancy places???? See, I am starting to rant already! Anyway, in my eyes, there is no grey area on this one – it is just WRONG! And Trent, if you lose the friendship over this, condsider whether or not it is really a huge loss!

  44. Jesse says:

    The personal responsibility shows when you make the hard choice, do what’s right for who your responsible to, and accept the consequences of your actions.

    It does not have to do with honoring a contract you signed with a bank.

    If the consequences of breaking a contract with a bank are better for me and my family than the consequences for honoring it then the choice is easy.

    If a business determines that the consequences of breaking a contract with an individual are better than honoring that contract their choice is easy.

    That’s not to say that people/business’ always come to the correct conclusion about which way is better for them though…

  45. Kacie says:

    Yikes. I hope she reconsiders her plan. She’ll probably have to pay that 10 % difference anyway–might as well do it WITHOUT it harming her credit.

    One option she could consider: Rent the house out for now, and when the market improves, sell it for a profit.

    She’ll still be able to move and pay cash for her new house, save her credit history, do the right thing, and make a little extra money.

    I hope the friendship isn’t ruined.

  46. Stephanie says:

    Your friend should sell the house at a loss and bring the extra cash to the closing to pay off the mortgage. I can say this, because I’ve done it!

    We bought a house in 1995 in an urban neighborhood that was supposedly up-and-coming. Well, it wasn’t. Three years later, we relocated to another city for a job, and crime rose in that area, coincidentally at the same time. We had already bought another house and relocated before we realized how badly the home’s value had dropped. Eventually, we sold the house for a sale price less than the balance on the mortgage. I had to show up at closing and PAY to sell that thing!

    We had good credit, but it was maxed out with the new house and the move. I tried to get a personal loan from a bank, but no deal. We had to borrow money from relatives to sell that house! It hurt us financially. I paid off the loan to the relatives as fast as I could because I was so embarrassed.

    Chalk up one life lesson learned. We emerged from that crisis with our credit intact, mortgage paid off, no guilt, but definitely some trampled pride.

  47. Jordan says:

    I agree with your friend. As a matter of fact I would take it even further.

    Since the stock market has gone down and I assume her stocks have decreased in value, she should walk away from those as well.

    With the high cost of fuel, I am sure the SUV she is driving is not worth as much now. Why keep it? Walk away.

    What? Her kids aren’t getting straight A’s in school. Take them out. It’s obviously the schools fault. I would say home school them, but…

  48. Tony says:

    Agree that on all your opinions on walking away from a mortgage, but your friend probably already knew what she was doing was wrong. Was it worth losing a friend over to point that out to her and try to make her feel guilty? If she was a friend, you need to let her make her own decisions and not pass judgement.

  49. Trent says:

    I wanted to post this one because I knew that my readers would have a diversity of opinions on this one. Looks like that’s clearly the case – good!

  50. kevin says:

    The xBox analogy is wrong – the person here is entering 2 contracts, 1 to borrow $600 and one to buy the xBox from the store. If the person defaults to the friend, they can offer the xBox, but there is no reason for them to accept. Stores take this risk directly all the time, with financing offers – if you don’t pay, they file suit for the money or repossess the items.

    If they enter a real contract, then this is an actionable offense. If not, then chalk it up to bad judgement of who you lend money to.

    I don’t agree with walking out on a mortgage, but I genuinely believe there are many situations (whether you are taking advantage of a loophole or just managing numbers) where this will work out for you. There’s no one to blame, the industry will take the hit, and suck it up.

  51. Pete says:

    @dogatemyfinances: It is very different from a short sale. In a short sale, the lender AGREES to accept less than the full amount of the mortgage in a negotiated agreement. They are motivated to do this because often it is less expensive for them than the cost of foreclosure. Since it is an agreement to accept a short amount as payment in full, the negative consequences for the borrower are somewhat reduced. (Still a ding on the credit, but not nearly as bad as a foreclosure, lawsuit, collection, etc.) Also, more to the point, I think it is much more ethical than just walking away. Agree 100% with Trent on this one.

  52. Michael says:

    Jeremy said, “… go back to sound money, which is the foundation of a sound & moral country & people.”

    What? That is precisely backwards. You cannot base your morality on money – that basis results in the unethical decisions that “Lindsay” considered. Instead, a sound morality insists on sound money and acts ethically even if the money isn’t sound. Morality and ethics come from the person, not the environment; Jeremy’s argument, at it root, is still insisting that an individual’s lack of ethical behavior isn’t their fault. Oddly enough, this is opposite of the stance Jeremy wants people to adopt.

    And Stephanie? Your pride may have been trampled, but it’s still there. The other option would have excised it completely.

  53. jtimberman says:

    Not only is it unethical, it is stupid. She’ll get foreclosed on and sued for the money she’s not paying back.

    This is just another example of typical laziness. Yes, its hard work to sell a house, but it is better than the alternative.

  54. Megan says:

    Thank you for this post.

    Yes, there are situations where foreclosure is unavoidable. Having just had emergency surgery myself, I can see how these bills that I keep getting would be crippling to someone living paycheck to paycheck. If not for good insurance and a strong belief in living frugally and saving what we can, we too would be in trouble.

    However, there are to many people tossing in the towel just because they can.

    When did this become and acceptable and somewhat normal practice?

    No one forced these people to buy a house rather than rent. No one forced them to sign those mortgage documents.

    When you borrow money, you pay it back. Since when is it ok to make a bank take a loss? Yeah, so they have lots of money. Have you thought about who the bulk of that money belongs to? How about US. The rest of the banks customers.

    Think it’s ok to let the government bail you out. Who do you think pays for that ? The rest of us. so the next time someone thinks about avoidable foreclosure, I hope they think about their friends, neighbors, and family members who are having to work harder and harder just to survive this economy and high cost of living.

    Why are we putting up with this? And why are we saying its ok for the government to bail these people out rather than let them fail and learn from their mistake?

    Why should the rest of us suffer the huge and growing government debt because of the bad choices of these people.

    I’m shutting up now because I could go on and on and on.

  55. SP says:

    I see someone already mentioned this, but the real issue is that she didn’t ask for your opinion (on whether or not she should walk away) so it probably would have been in your best interest to bite your tongue (and blog about it for our enjoyment!)

    She probably felt pretty bad about the whole situation. It is like telling an overweight person they are unhealthy and need to lose weight. They already know that. You aren’t helping.

  56. Bill says:

    I don’t condone walking away either. In fact, I had a similar experience: One of my good friends from my MBA days said he was going to walk out on his commitment; I haven’t heard from him since I implored him not to.

    Interestingly, the news has reported many financial experts and planners have recommended to their clients to do just that — walk away from their mortgage.

    However, the consequences of breaching the contract (it is a legally-binding contract) are nil. Okay, the fact that you didn’t pay your debt will be reflected in your credit record and will negatively affect (severely) your FICO and other credit scores. But it remains to be seen how this long-term consequence will outweigh the ‘here and now.’

    I don’t know why lenders don’t sue borrowers who renege on their obligation. It must just be a numbers game. However, I work in the credit card industry and I *know* my company is first in line at bankruptcy proceedings and is very aggressive in its collection efforts. After all, it is the credit card company’s money. In the case of a mortgage, it IS the mortgage company or bank’s money.

    Sure, they get a house, but they don’t want a house any more than a credit card company wants a boat. It’s money they want.

    People make choices based upon known information. If you know there are no consequences (except “feeling bad”), 9 out of 10 (perhaps 99 out of 100) people will walk. Especially if validated by the “advice” of so-called financial experts.

  57. Jeremy says:

    People who are not placed in a situation like a foreclosure who decide to walk away simply because they have a loss on paper just boggle my mind. You bought a house and thought it was worth X amount of dollars, so you got a mortgage. There are no guarantees that it would go up or down, you simply agreed to purchase something for a certain amount of money.

    How come you don’t hear about people walking away from their car loans the day after they purchase the car? A vehicle will lose value immediately, and is almost guaranteed to every year for as long as you own it, yet you’re still making loan payments for the initial purchase price.

    The only difference is the perception that real estate must go up in value, and vehicles will go down in value, so that somehow justifies walking away from a mortgage because the outcome wasn’t as expected. Well, if you weren’t considering that before going into the purchase, you probably shouldn’t be a homeowner anyway.

    But I guess if you want to take the loss and hit to your credit score simply because you may have a loss on paper, good luck to you, but no thanks to you for making the real estate problem worse by unloading your house to the bank when they don’t want it.

  58. Johanna says:

    @Jeremy: No, there’s more of a difference than that. Car loans are recourse loans, so if you default, the lender can repossess the car *and* go after your other assets to make up the balance of the loan. For many (but not all) mortgage loans, they can’t do that – if selling the repossessed house doesn’t pay off the loan, the lender has to eat the difference.

    This is why, in their sensible days, lenders required a 20% downpayment for a house. In the worst-case situation, if the borrower defaulted right away, the lender could be reasonably sure that they could sell the house quickly at a 20% discount and suffer no loss. But lenders haven’t been so sensible lately.

  59. Jeana says:

    Joe (comment #7) said:

    “It may not be ethical but it is not unfair to the lender – lenders price the likelihood of such events occurring into the rates that each borrower is offered.”

    By this logic, shoplifting isn’t unfair either, because the stores raise prices to cover their losses. This is just one more reason why walking out IS unfair, because those of us who are not walking out are paying higher prices. In both scenarios, the honest are paying the bill for the dishonest.

  60. Steve says:

    As they say down under, good on you, Trent. This loss of a friendship is just simply a manifestation of the ever widening gulf between your values now and the values you lived by just a few years ago.

    Your friend’s actions might not have seemed that unethical prior to your financial meltdown and recovery. But you’ve moved in a completely different direction in life, and sometimes that only becomes apparent when you reconnect with people in your past who still live by unhealthy values.

    Take it as a testament to your substantial progress in straightening out your own financial life, and recognize that even friends have value conflicts over time. She might very well contact you in a few years and let you know that she’s no longer suffering from “cranial-rectal inversion.” I know this because I have firsthand experience in reconnecting with friends who kept me at arms length during my “tomfoolery” years.

    Best,

    Steve

  61. Wes says:

    I agree that walking away is unethical, however I think it’s a horrible idea to dole out advice to friends when it’s unsolicited. That is indeed how you lose friends. If they pointedly ask for advice, sure, give it…you know their situation and they’re asking for your help. When you hear of someone making a financial mistake, it’s tempting to give the same great advice you give daily on your site, but don’t do it. Unsolicited advice is rarely rewarded, and more often viewed with contempt.

  62. Rick says:

    In the strict legal sense, there is nothing wrong with walking away from a mortgage. The risk of default is priced into the interest rate. Not making payments is still following the terms of the contract; the bank just has a right to repossess the property, as written in the contract. It’s perfectly fine. In fact, major banks do this all the time. It’s just part of the cost of doing business, and such costs are written into the interest rates.

    HOWEVER, I do agree that while walking may not be illegal, it is unethical. As Trent mentioned, there is a good faith aspect to the deal. But more quantitatively, by walking away, you are increasing the costs for everyone else. Since the bank does have to price in the risk of default into the mortgage rate, the rate will thus be higher than if people didn’t default, and so your actions end up costing other people more money.

    Any time your own actions cost others, especially in the form of these hidden costs, that action is usually immoral.

  63. Adrian says:

    I like Trent’s blog and I have been able to use many of his articles and links to my advantage. But I must say that this post brings out what I dislike most about Trent: he seems so self-righteous!

  64. Tyler Corlen says:

    Some of the lenders were unethical in their approach to originating loans. I think the mortgage mess is more the fault of the banks trying to make as much money as possible (that sure backfired). Consumers certainly should perform due diligence when decided if they can afford a mortgage but given how fast the market was growing, it was hard not believe that your property would increase over time (albeit at a slower rate). I doubt most people would have believed the value of their house would decline so much in such a short time.

  65. Winston says:

    I don’t think honesty is the problem that might have cost you the friendship.

    Just because something is true doesn’t mean that now is the time to say it.

  66. KoryO says:

    There is one thing about this whole situation no one has mentioned.

    Is this the first time she’s pulled, or attempted to pull, something like this? As other people have pointed out, there are other options (renting the place out until the market improves, getting approval from a bank for a short sale, etc.) She’s not doing them. This could be one-off behavior, or maybe she was framing a hypothetical question….or this is her M.O. since she left college. We don’t know.

    Does she have a history of financially, emotionally and otherwise screwing people over? Does she only honor “a deal” when she’s benefiting from it?

    Sure, what she’s doing is unethical, even if not technically illegal, and yes, it will eventually catch up with her. If this is typical behavior for her, maybe what you’ve really lost is a *fiend*, not a *friend*, and you should be thankful she revealed her true self to you before you got burned by one of her stunts.

  67. Jeremy says:

    Johanna, I know they are different types of loans, that wasn’t the point. What I was getting at was it is the mindset people have going into a purchase that drives these decisions. Common sense tells even the stupidest people that they purchase a car knowing that it will go down in value. That is just expected.

    But at the same time, people have been trained to think that when you buy a home, it goes up in value every year. So when this isn’t the case, people freak out. In fact, for all they know, they might be able to sell their home for the same price they paid, nobody knows. Just because the media or your realtor says home prices in your area are down 10% doesn’t mean anything. It certainly could be true, but something is only worth what someone else is willing to pay, and there could be a buyer out there and thinks the price you’re asking is fair. But all of this is moot if your house isn’t on the market anyway, so you have no real way of knowing what it is really worth in order to base your decision.

    So I find it asinine that people will make such a drastic decision based on the assumption that there is a “loss” simply because someone says so.

  68. You really think the market’s coming back, even two years out? I don’t. And you know why? Because tens of thousands of bad risk lendees like your “friend” are, along with the end of oil, devaluing our currency and forcing this entire country into collective bankruptcy. The fact that the rest of us have lived within our means won’t do us much good, unless we were lucky enough to buy long before the housing market explosion and have already paid off the loans. I’m not one of those people, unfortunately.

    Kunstler says it much better than I can:

    http://jameshowardkunstler.typepad.com/clusterfuck_nation/2008/07/event-horizon.html

  69. momof4 says:

    What about the idea that she’s going to pay cash for another house? This is clearly not a hardship case, and her walking away from her obligation adds to the burden for the rest of us. Tough crap on the unsolicited advice. In my opinion walking away when you can pay cash for another home is CRIMINAL ( morally) and if one of my friends were about to commit a crime I would absolutely give unsolicited advice.

  70. I agree, momof4. I think that what she’s doing is morally wrong, and I wouldn’t do it myself(although I could sort of understand the temptation). I think the havoc it would wreak on my credit would take the majority of the temptation away, though.

  71. Maggie says:

    Thank you for speaking against such things! We’re in a situation where we bought a condo in southern California in 2005 (right before the crash). We’re over a 40% loss right now and my husband finally found a job in northern CA where our family is and we have wanted to move. (Yes buying the home was not a good move when we knew we didn’t want to live there for more than 5 years, now we know). Well we’ll be renting our condo out (for nowhere close to the mortgage payment) and renting a house in northern CA (for less than what we’ll be getting for our condo, so cash flow will increase). People are telling us that we should just walk away. I can’t believe someone is considering it for a measly 10% loss. That’s just wrong. In her case it’s obviously a matter of convenience. We have foreclosures in our complex and I have little sympathy for the people who are walking away (who haven’t had some tragedy to make it impossible to make payments). Even those in ARMs who can’t make the payments should’ve figured that out before hand. Ours is an ARM, but we’ll be able to handle it when/if it does go up in 2 years. Again thank you for your solid post, it brought me out of lurking as this is something I feel strongly about.

  72. Johanna says:

    @Jeremy: Well, you asked why people walk away from home loans but not car loans. And I answered. And the answer has nothing to do with people’s mindsets – it has to do with the different terms of the loans.

    True, it’s not impossible that she might find a buyer willing to pay more than the appraised value of the home. Anything’s possible, and there are a lot of stupid buyers out there. But there are even more homes on the market with ridiculous asking prices, and they’re not all going to find stupid buyers.

  73. Joe T says:

    What your friend is doing does sound unethical to me, based on what I know of the situation from reading this post.

    But the real question that you should be asking yourself is: “Do I want to be friends with a person who behaves unethically?”

    If your answer is “yes” for this particular person, you should apologize for the unsolicted advice you gave her, and hope to god she doesn’t read this blog.

  74. Eden says:

    It’s definitely unethical, but it’s clear that lenders have behaved unethically too. I would also argue the government was unethical by bailing out stupid people.

    Two (or 3) wrongs don’t make a right, but I can certainly understand why people are doing this so often these days.

    The bank should have been smarter when it considered the loan and not made it. Your friend should honor her word and fulfill the obligation. Those points are obvious now but there is nothing that can be done to change the situation. Sort of a moot discussion overall.

  75. FW says:

    If she has enough in stock options to cash in and pay for an entire house, ruining her credit at the same time and probably getting sued, why can’t she sell the house, use the stock options to pay the difference and a hefty down payment on the new house with a solid, rational mortgage on the remainder and keep her credit and good name intact?

  76. Randy Hunt says:

    This has nothing to do with ethics. Any business-school graduate will tell you there’s no such thing as ethics, and it’s quite certain that the lending institutions (businesses) never had ethics in mind when they made the decision to stop verifying income when they wrote these mortgages. This isn’t a matter of ethics, it’s a matter of economics — that is, incentives.

    In a modest, fixed-rate 30 year mortgage, the incentive is there for you to maintain it. The hit to your credit would be worse than simply making your house payment, even if the value of your house has dropped by 10-20% in a bad market.

    However, in a high-interest ARM, where you’re paying twice the reasonable payment on a loan that is twice the value of the house, the relatively minor hit to your credit is much less painful than making that payment every month.

    But, since we live in a world that loves the idea of ethics, let me put it this way:

    You are so quick to put all this ethical responsibility onto the shoulders of the homeowners who want to “walk away”, but isn’t that a one-sided assessment? Isn’t there just as much ethical responsibility, then? These homeowners signed their names to bad loans, but those bad loans were authored by the very lenders who are now asking for a bailout too!

    And in regard to the idea of a bailout, I think we should not do it. Not for the lenders, and not for the homeowners. The marketplace should sort out its own mess. Some lenders will collapse. Some homeowners will default. Eventually, the water level will even out and life will go on.

  77. Trent says:

    “he seems so self-righteous!”

    There’s simply no way to always win. If I express an opinion with confidence, I come off as self-righteous to some. If I express opinions with a complete lack of confidence, I come off as spineless and mealy-mouthed to some. If I express no opinions at all, the blog becomes boring and never generates any discussion.

    I’d rather be “self-righteous” sometimes and challenge people to talk and think than either of the other two. If it results in people calling me self-righteous – well, I guess that comes with the territory.

  78. J Parker says:

    Is it still unethical to walk out on a mortgage if the other side wasn’t playing by the rules in the first place?

    Please, everyone, take the time to listen to this episode of This American Life regarding the housing crisis that we have found ourselves in…

    It’s definitely hard to feel sorry for these companies once you’ve heard what they did to get themselves into this mess.

    http://thisamericanlife.org/Radio_Episode.aspx?episode=355

  79. Richard says:

    I completely agree with you about the ethics, and especially with regards to the bailouts. People who are financially cautious and take the extra time to suss things out will never see the benefits of Uncle Sam taking pity on the little guy.
    And the flip side is that those who throw caution to the wind and convince themselves they can afford an ARM on a McMansion will never feel the pinch enough to give them pause the next time around.
    The bailout just sets examples for future irresponsibility for everyone involved, including lenders, and for everyone on the sidelines watching.
    We need a long time out.

  80. TJ says:

    It is good to hear that you were honest. I had to tell a friend recently something that wasn’t easy to hear, but was the right thing. With her a lot of emotion was involved, with this, it sounds more like scheming.

    Is this what’s wrong with the USA? There seems to be very little accountability. I’ve known many people, who once in debt realize they will need to file bankruptcy, so they buy more, do more so that in a few months when they file, they can include that bill. It’s disgusting.

    Financial hardship is another. When someone has no assets left, and they are forced to let a home foreclose due to job loss, disability, etc.. that is different. But this, it just happens too often, and the people doing it don’t learn a thing except that their scheming was successful.

  81. Will says:

    I agree with Randy. Banks have their own agenda in granting mortgages. They don’t loan money to people because it makes them feel warm and fuzzy inside. Would I walk away from the loan of a “friend” for my own gain….no, not in a million years. Would I ever consider the bank a “friend”….no, not in a million years. They always make sure they get theirs, and that’s no friend at all.

    There really should be no help for either party, and it seem like they both lose regardless.

  82. Robert says:

    Ethically, yes, it is just wrong. But what I’ve learned in my (young) 30 years is that it’s a “dog eat dog” world. Better someone else (in Lindsay’s case, the bank) than me.

    P.S.
    I am current on my mortgage so my comment above is not to say that I have or will do what Lindsay did, but just wanted to point out that in this world you got to take care of #1 or the world will eat you alive.

  83. Paul says:

    I was hoping you would post a response to that Trent!

    To Randy Hunt (#50 above),
    I couldn’t find another comment in all of these that I agreed with more than yours. I think you said exactly what I wanted said, and I’ll leave it at that.

    One final thought though.
    I wonder if the bank finds out that she has this new house if they could go after her for it? A friend of mine defaulted on a truck loan years ago and they came after him for about 4 years, even taking him to court. Hmmm, makes me wonder..

  84. imelda says:

    I’m curious whether Trent–and the others who echo him– approve of the government bailing out Fannie Mae, Freddie Mac, et al? It is the same case of failing to take responsibility for one’s own actions, isn’t it? I’m assuming that everyone who made this argument opposes the bailout of the lenders, too, but I just wanted to confirm that that’s true.

  85. Troy says:

    There are varying degrees of ethics. Lots of things are unethical. Divorce, late payments, even eating meat and cutting down trees can be described as unethical by some.

    Is it unethical to walk on your mortgage. Maybe. Is it unethical to shoot someone who is breaking ito your home and threatening your family. Maybe.

    The point is to assess the situation in the proper context. A SMART person understands the situation and the rules surrounding the situation. In many states, walking away from your mortgage is non-recourse, meaning the lender cannot come after you for the difference. In addition, the Gov’t has eliminated the taxation of the write-off as a taxable event.

    So, for many people, this is a viable option. If that person is incredibly upside down, lives in a non-recourse state, and the mortgage fits the parameters, it can actually be a financially savvy move. Is it ethical? It is when the decision betters your family situation.

    If this move allows a family to eat, to move to a better situation, for the kids to move to a better school, closer to family, or whatever the reason, then I understand why people are doing it.

    It is like raiding your retirement plan to pay off your debt. Most people say that is a bad idea. Forget what they say. It may be a great idea for you if it allows you to get a fresh start and focus on what is important in your life.

    The simple fact of today’s society, and one that few will admit, is you have to look out for yourself, because no one else will. Take care of yourself, and your family first.

  86. RI says:

    I don’t know about in Iowa, but in Canada the bank is the one that has the option of foreclosing (and relieving the buyer of any further obligations) or conducting a power of sale. In a power of sale, the amount of the mortgage not satisfied by the sale is still owed by the borrower – it’s just not secured against anything (although in a case like your friend’s, I think the bank could find a way to attach a subordinate (2nd, 3rd) mortgage against the new home). So walking away from a home that has value less than the mortgage doesn’t necessarily mean you increase your net worth.

  87. Justin says:

    Unethical. No question. Pay your bills or don’t sign up in the first place.

  88. Johanna says:

    @Paul: See my posts about recourse versus non-recourse loans. Or look up those terms for yourself.

  89. CBus says:

    This is the whole reason you collatoralize large debts.

    If you finance a car, you sign the title saying “BANK XYZ gets the car if I default.” You are typically obligated to take out collision and comprehensive, not to mention encouraged to assume gap insurance.

    In Lindsay’s situation, it sounds as though she put down less than 20% on the home. As a consequence, she was likely paying PMI in the event that this scenario did arise.

    Now is this the best approach for her to follow? Maybe! If she can walk away from the house and purchase one outright without relying on her credit score for 5 years…maybe so! Even so, if she can apply for a mortgage now for a house in Iowa, she still may come out ahead.

    I don’t think it is unethical. Both parties are conforming to the conditions of the contract. The mortgager knew the risks of the loan defaulting (whether or not it was expected) and Lindsay knew what would happen if she owed more than the house was worth (whether or not it was expected). She even volunteered to pay Private Mortgage Insurance in the event that it did happen.

    For the mortgager to earn interest on that money for the next 30 years (for example), he or she took the risk of default and planned for it accordingly. For Lindsay to buy that house, she took the risk of a depreciation in home prices, and paid for it through PMI to this point, and will exercise the appropriate sections of the contract agreed upon by both parties.

  90. Noah says:

    This is an ethics question how?

    I’m not understanding peoples’ “sacred” view of a contract. A contract is an agreement between parties that will be enforced by a court. It facilitates doing business, nothing more. Actually, an agreement that is not enforceable by a court is probably more “sacred”, as it relies on trust rather than legal authority.

    But anyway, your friend walking away isn’t avoiding the contract. Instead of Clause A, telling her to pay, she’s going with Clause B, which says what happens when she doesn’t pay. Her walking away isn’t just priced into the contract, it is actually written there.

    As you say, it may not make as much financial sense as she thinks. And it’s true the cost may be passed onto the rest of us. But is that her fault, or the bank’s? They did write the mortgage agreement after all. If a store sells widgets at $20 less than they should have, should I not buy some, even if the seller “regrets” it? Even if they raise the price next month to compensate and pass their mistake onto all other widget buyers?

    For all the people who think this is a personal/ethical situation, try to imagine the woman as a business, just like the bank. And try to imagine the bank not as inviolate as everyone seems to think. Who precisely entered into a bad contract here?

  91. Brian says:

    Think of it from the perspective of the lender. If I lend my friend $700 for an Xbox that cost $600 and he, after 3 months, returns me the Xbox and says he can’t finish his payments, who is to blame? Will I be upset? Of course I will. Will I continue to be his friend? Probably not. But in hindsight I would have to think it was pretty stupid in the first place to lend him the $700. That is the risk I took as a lender and should have incorporated that risk into the interest rate I charged. If I didn’t anticipate the possibility of that happening….shame on me.

  92. Wesa says:

    If your friend is in the 3rd situation, with an ARM that she can’t pay off, I sympathize. Truly. Yet…if she has stock that she can cash out in order to buy a new home, she should be using that stock to pay off her current home, regardless of the financial downturn. It’s the right thing to do.

  93. Mo-Town says:

    Trent:

    I agree that walking away from your mortgage when you don’t absolutely have to reflects poorly on a person. But with regard to comment # 51, I think you’re shooting the straw man. The folks who said you came off as self-righteous weren’t criticizing you for blogging on the ethics of walking away from a mortgage. They were talking about the unsolicited statements you made to your friend.

    Nobody likes unsolicted moral advice, and based on your description of what happened, that’s exactly what you gave your friend. How would you like it if you mentioned to your friend that your family was planning on renting an RV and taking the kids on a cross-country road trip for summer vacation and her response was to tell you that, in her opinion, you were being environmentally irresponsible? Just my $.02.

  94. Paul says:

    @Johanna,
    No need to look them up. Pretty obvious meanings just by the terms.

    I’m just saying that it would be nice, at least in this situation and to my ear, for them to be able to come after her for the difference of the loan. Not that all lenders deserve to be let off the hook either, that’s not what I’m saying, but what was suggested to Trent by his friend was just wrong. At least to me.

    As for a bailout, no way. This situation should be shouldered solely by the lenders and the borrowers.

  95. Jenn C. says:

    I absolutely agree about the bailout as well – unless borrowers can show clear evidence that they were outright deceived about the terms of their mortgages, I don’t see why we should bail them out. They wanted to believe, they didn’t do their research, they got burned. Let them go on a budget for a few years to work it out. At best, we should allow those that are strapped to re-finance into market rate 30 year fixed mortgages that cover the remaining balance on their loans.

  96. Cathy Braun says:

    @imelda #55

    I am totally against the bailout of Fannie and Freddie – if it passes the bill onto the taxpayers. The shareholders profitted from lousy loans, and so they need to pay for this. Anything else is unacceptable.

  97. Nick says:

    I’m sick of government being ready to bail out these massive companies. Why on god’s green earth would you expose your company to bad loans? Its simple, only carry so many “sub prime” loans. It should be a small percentage. You should go into them knowing that if they all default, that your company will be fine. These CEO’s were irresponsible and people should be going to jail in droves over this.

  98. Carol says:

    I have a friend who has declared bankruptcy twice, lives in a house much nicer than mine, has two new cars and a new boat. Her daughter will be going to college next year. They have saved absolutely no money for their daughter’s education. They borrowed money from her brother when their dog got in the boat and destroyed a couple of the seats! I live in an older, not so nice condo – I definitely would have liked a nicer place but I can AFFORD where I am. I would never have considered borrowing more than I knew I could pay back. I don’t want the government to bail people out who live in nicer houses than me! I would think that only about 5% of the “walk aways” had a really compelling reason to do it.
    Thanks for letting me rant!

  99. Pointed Cap says:

    Walking away from my mortgage made the most sense for me. My lender kept raising rates and would not re-finance my loan, even as the value of my home dropped.

    That’s hardly “good faith” on their part.

    I could have afforded a lower rate and stayed in the house, but instead I got to live 6 months mortgage-free and save up for a move.

    I think the lender deserves to inherit that money pit.

  100. Mark B. says:

    My friend bought a house six years ago in a suburb of Detroit. He got a government backed FHA zero down loan.

    His job is now relocating him to North Carolina, however, his house is now worth about 60% of the original value (things are VERY BAD here in Detroit).

    He is upside down on his home and does not have the money to cover the difference, but he HAS to move for his job.

    What are his choices besides walking away? There are no jobs around here, so staying is not an option, but he cannot afford to pay two house/rent payments.

  101. b says:

    OK, even though this post has its share or replies already, I have to get my two cents in.

    I am finding myself facing a situation similar to your friend. I live in Nevada (strike 1), I bought a house in 2006 (strike 2), and my mortgage company went under and will not write any new loans (strike 3). We purchased with an ARM, due primarily to a few straggler bad marks on our credit from just at 7 years ago. We were assured by many people that we would be able to refinance in 2 years when we reset (esp. since we were finishing repairing our credit otherwise), in order to get something that would remain stable. We could afford the house with no problem then; we even bought at just over 1/2 what the bank qualified us for. Now we find ourselves with a property valued at literally HALF what we paid, unable to refinance (the servicer did say they would freeze our intro rate though, but it’s a brutal number), and my husband is now trapped in a horrible job (his company was purchased in the last year and it hasn’t gone well). The only way he can comfortably look for another job is if we make plans to cut our monthly output. Trying to short-sell the house would likely result in our still owing nearly $200k on it. Trying to wait out the market means that we’ll probably be paying our high interest rate for upwards of 7-10 years, if the forecasters are correct, before we are back to zero equity. Or, we can try to save up some cash in the short term and either buy something smaller or find a rental to hold us over for the 4-7 years a foreclosure would impact us.

    It’s an ugly spot to be in, especially in the Vegas area. But the options are so limited when you’re trapped in a house that you can’t sell, rent out, or refinance.

  102. Mark B. says:

    The unfortunate thing about this situation is that the honest people who pay their mortgages end up hurting the most.

    For example, a friend of mine is walking away from his house, but first he has gotten a new mortgage on a new house in a different state. Since values are down he was able to get a much nicer house than he had before. So he is going to be paying about the same amount for a much nicer house.

    Now, I am underwater on my house and would like to move, but I do not feel right walking away, therefore I will be paying as much as my friend for a much smaller house.

    Doesn’t seem fair…..

  103. Jules says:

    While I usually side with the indignant huffery about how people should sign up for what they can’t pay fore, I think a lot of people are forgetting that the mortgage crisis is, in a large part, the Fed’s fault.

    I’ve been following the whole debacle pretty closely, and here’s my take on the thing: Home ownership has, for a long time, been considered a measure of economic health. In the 90′s, when people were actually accruing wealth, a whole new industry evolved, whereby mortgages could be divided and the risk split more evenly between several banks.

    I think you can see where this is going: Government policies are designed to encourage home ownership. Unscrupulous lenders would give people who really couldn’t afford a mortgage a mortgage, sell the mortgage to a bank, and cut loose with the cash, leaving the bank to hold the strings when the people defaulted. IOW, lenders didn’t do adequate checks to make sure the people they were lending to were of sound financial means.

    Add to this the fact that oil prices have been steadily increasing for the past two years, and houses tend to be not-in-the-city. Factor in being a ten-minute drive from anywhere when you’re in the suburbs, and suddenly it comes down to putting gas in the car, not paying your utilities, or defaulting on your mortgage.

    Fannie/Freddie did not actually give out sketchy mortgages, but because they have such a huge stake in the mortgage market, if they were to collapse, it would literally cause financial mayhem–Zimababwe is probably an exaggeration, but I’m sure it will feel that way.

    The short version is that the story in its entirety is hugely complicated (which is probably why every turn is so grossly exciting to me) and it’s not as simple as people not reading the small type.

  104. Jules says:

    Er, there are a few typos in my opening statement: obviously, it should read “should not sign up for what they can’t pay for”

  105. Paula says:

    I do agree that it is very unetical to walk out of the mortgage. However, the bank could possibly make its money back and then some by placing the property up for auction and selling it for the balance of the loan or more. That is the way I bought my home. The previous owner did not pay federal taxes for his business and they went after the other properties he owned to get their money. It went up for auction and we ended up with a really great deal.

  106. Jon says:

    It’s like saying if you get in a car wreck, you shouldn’t file a claim even though you have insurance because A) it raises rates for the rest of us, B) it costs the insurance company money, and C) you should just suffer through the loss out of personal responsibility. Why????

    If you have a business agreement with the bank and you decide to exercise some part of it then good for you. Have no doubt that the bank would leverage every word of the contract against you that is to their advantage!

  107. Tony says:

    Two different issues here -

    One – is it morally ethical to walk out on mortgage and

    Two – should you offer a friend unsolicited advice?

    Two very good topics of discussion. Maybe the other one should be examined in a separate entry?

  108. Sam says:

    Right on, Trent! Friends of mine just quit paying their mortgage since they know they’re going to get foreclosed on anyway, and are socking it away for their next place. I know it makes sense, but part of me balks at how horribly unethical this is.
    I also feel shafted that I made the right, but tough, choices when I bought my place, by insisting on a fixed mortgage I could afford, in a smaller place. Now I find out that I could have just WAY overextended and let the gov’t bail me out. Insane.

  109. Brian says:

    I’ma have to go against the grain here and say that “walking away” from a mortgage is perfectly ethical.

    The consequences for terminating the contract are in the contract. If someone’s willing to eat the consequences, it’s their right to terminate it, whatever the reasons are. If more people are terminating then you’d like, you didn’t make the consequences stiff enough.

    The banks took an awful risk abandoning the 80/20 model, and it looks like it’s biting them in the ass. But it was their risk, not your friend’s – don’t pin the blame where it doesn’t belong.

  110. Vikki says:

    Amen!

    I completly agree with the other commentors about the lack of personal responsiblity willfully walking away demonstates. And that this is an emnormous national problem.

    As I walk to and from work each day (I live in downtown San Francisco)I am asked for change from an average of about 5 people per day. In at least half of the cases, the individual is dressed better than I am (as in a ‘traveling’ kid in very tall Doc Martins, $75 Ben Sherman jacket or some other variant in new Nikes) By the city’s own estimates, 80% of panhandlers HAVE homes and 100% have access to city programs for shelter, food and clothing (not new Nikes, but basics).

    My compassion for genuinely homeless, disabled and disadvantaged has been almost entirely eroded by the daily assault. I work hard for my financial freedom and am committed to doing homework and correcting past mistakes I have made. I am outraged that it is acceptable to ‘ask’ to be bailed out of financial hardship by strangers and the government. I am disgusted that anyone expects thier mistakes to covered by anyone but themselves.

    What ever happened to self respect?

  111. Amy says:

    Trent,

    I’m curious if your position changes if the numbers are worse, like #63 alluded to.

    Here are numbers on my street. These are not in the newspaper or some unverifiable internet site. One of these houses is next door to me.

    House bought in 2005: $409,000
    House bought in April 2008: $210,000

    Both houses are the same size.

    Now, I’m trying to sell my house too and we pay all our debts, but I keep wondering what is keeping the man in the first house from walking away? Would it be just exercising the option, as Joanna mentioned? I’m glad he’s still in there for now, as it’s hard to imagine even more stuff on the market than there already is. We’re in FL.

    Of course, I’m ticked that the government is bailing out. This privatizes the profits while socializing the risks. Perhaps now the banks will send me dividends when they turn around in a few years?

  112. Ben says:

    Big business has long ago given up on “good-faith” morality… take a minute to think about all the corporate bankruptcies that are used to dump employee contracts/pensions/healthcare and all the hidden fees that banks and credit card companies have been sticking to their customers.

    Walking away is unfortunate but it’s playing by their own rulebook. I would not feel bad about it.

  113. mk says:

    We all operate our life with our own code of ethic, and how ethical the person is varies if you ask me. Walk away is a big decision, with financial and emotional impact.

    I can only suggest what’s the best thing to do, and what’s the right thing for HER. How I judge her ethic is not as important.

    The country I came from, mortgage loan is recourse loan. You can’t just walk away, they follow you. Does it make people more ethical? Not necessary. At least, realtors and lenders should exercise higher moral and standard of ethics as professional duty than a customer who sign the contract.

  114. E says:

    She’ll be sued for the difference. Since she has enough assets to pay cash for a house laying around I imagine she’ll have some other assets they can get to to make up that 10% plus their professional fees. If not, she may want to check Iowa homstead laws to see if they can take away her new house or not. Anyway, she should just pay the 10% she’s short and put it behind her.

  115. Ben says:

    Also… assuming that her loan was used exclusively for the home, and she lives in a non-recourse state (like CA), then the only thing that the lender has claim to is the property. So probably no risk of a lawsuit.

  116. This may have been said in the previous 67 comments but unless you are in really dire straits you really shouldn’t “walk away” from your mortgage.

    The “Buy and Bail” scheme that Trent outlined is one iteration of a new, frightening trend. Some are taking the route Trent’s friend took. A more common one is to buy a similar property for much less money while creating a fraudulent lease for your existing home. Once you get the mortgage for the cheaper place you “bail” on the other place. Talk about unethical. It sounds down right criminal.

    Of course, lenders have caught on after having been burned a few times and tightening up guidelines to make it even harder for legitimate home buyers/borrowers to obtain a mortgage.

    This type of behavior is “every man/woman for themselves and screw whatever happens to you”.

    So, potential home sellers, when you can’t sell your house because you can’t find a buyer who qualifies for mortgage because lenders have tightened standards and qualifications up so much because people like Trent’s friend were gaming the system… you can thank the [mortgage]gamers of the world.

    People just do not think past the point of immediate gratification. No wonder there is a negative savings rate, rampant debt and a housing crisis of mammoth proportions.

  117. Ed says:

    I totally agree with you Trent and appreciate you sticking your neck out to say so. But really, Americans are very accustomed to backing out on commitments, just look at the divorce rate. Just because something is legal does not make it morally right!

  118. Ben says:

    By coincidence I saw this a on craigslist a couple days ago… for those who worry about being able to get another mortgage after bankruptcy, just pay your bills for 12-24 months and uncle Sam has you covered!

    http://sfbay.craigslist.org/eby/rfs/761798389.html

    Buy this property with only 3% down! Here are some facts surrounding FHA:
    * 97.15% CLTV
    * Any buyer; not just first-time buyers
    * Current loan limit $729,750 (each county will vary)
    * 100% gift allowed for down payment & closing fees.
    * Easier qualifying criteria; not fico driven. Bankruptcy: Chapter 7: 2 yrs. from discharge, Chapter 13: 12 months on time payments
    * FHA loans are assumable to qualified borrowers.
    * 31/43 debt ratio guidelines – can go higher with specific borrower.
    * Seller can pay all closing costs up to 6% of the purchase price.

  119. Camilo Rizo says:

    Hi Trent, Ive reading your blog for two or three months now, and if is pertinent, Ive been reading it from Colombia, South America.

    Here, at Colombia, we had a sort of “mortgage-financial” crisis. We had inflations rate that made loans as tree or four times bigger than house price itself. Then, there was no “moral risk” of walking off the mortgage…was an absolutely rational decision. The bottom line is I do not see an “ethical” issue in the process of lending. As any other business, the facts are clear from the beginning and the lender’s JOB is to value correctly and objectively those assets and clients that he receives as collateral, and come out with a good product. That example of the X360 was a “kind of” leasing instead of a loan, and there is a VERY big difference between those products.

    I see that you’re a very right guy, and that is a virtuous quality in all ways. But, quoting the biggest Puzo: “Its nothing personal… its just business”.

  120. Jer says:

    The banks caused the crisis by giving loans to people who couldn’t afford the houses and the people that took the loans are just as guilty. The federal government has made emergency loans available (very cheaply) to the financial companies who speculated in mortgages, oil, etc. The taxpayers will pay for the mess once again caused by government deregulation. Used car salesmen do not make good mortgage brokers.

  121. Frugal Dad says:

    There is almost always a better option available than simply walking away. She could work with the lender on a short-sale, or could sell some of those stock options to pay the upside down amount on the house, sell it, and rent one in the new town (if she doesn’t want another mortgage–and it sounds like she doesn’t need one).

    I have heard stories of people in far worse shape than her working two or three jobs, and selling everything but the shirts on their backs to stay current on a mortgage. It seems awfully selfish to turn her back on her financial obligations without a more compelling reason than just because she can.

  122. DM says:

    Wow. Can someone pass me the rose-colored glasses you’re all wearing? If everyone had a clear and comprehensive picture of the mess that caused Lindsay’s situation there should be no question of ethical validity.

    Spend a few hours with Calculated Risk, Mish, or HBB first before forming an opinion. Here’s a good place to start: http://globaleconomicanalysis.blogspot.com/2008/01/business-of-walking-away.html

  123. Ann says:

    Must be a good post, Trent, if so many of us have something to say.

    I do get a self-righteous tone from your posts every once in a while. But I agree that it’s better than having no credibility because you’re too wishy-washy or not willing to stick to your values.

    And, honestly, a large part of the reason I keep reading this blog, even posts I don’t think I’m interested in, is that I connect somehow with your tone and the way you share your experiences and connect every day moments to dollars and sense/cents.

    I also think that blogging is a risk–as you know perfectly well–that people will want to take you to task for “thinking you know everything” when really, you are just putting your thoughts and advice out there to try to help and spark discussion.

    You don’t know everything, Trent. And sometimes you’re wrong. (Aren’t we all?) I still want to know what you have to say, even though you are a stranger to me. THAT’S saying something.

    But I guess I’m off topic, now, huh?

  124. Matt says:

    I enjoy reading your blog, except when you post these kind of moral/financial rants. This is at least the second time that you have reported losing a friendship based on your moral opinions about finances. These posts make it less enjoyable to read your blog and make me concerned about what kind of person writes the blog I read.

    In these kind of situations I wish that you could relate the story without opinion, or even better with concern for your friend, and then tell me about how one could get around this problem or what consequences one faces when making this choice without the “good faith” issues. Stick to the financial issues.

    Maybe your friend went to her bank and tried to get them to settle for a short sale and, like many banks in my area, they’d rather foreclose, wait for congress to bail out the industry and then sell the house when the market rebounds. Regardless if she’s your friend, why do her financial arrangements effect how you feel about her?

    I hope to continue to read good financial advice in your blog in the future.

  125. pg says:

    Thanks for talking about this.

    I have seen people with higher incomes walking out of mortgages because the home valuation has fallen down drastically and they have no equity to be lost. They bought homes on interest only mortgages and 0% down. Essentially like renting a similar home. They lose nothing. But have paid exoboriant commissions and fees to no good real estate agents, mortgage brokers and escrow agents (and ho btw they charge $150 dollars for sending emails).

    Who asked these folks to bid above the crazy prices ?? It is really pathetic that these folks do not even feel any remorse or have any sense of wrong doing.

    Real estate industry is completely screwed up. I come from a country where people claim there is lot of corruption. The only difference i see in US is these kind of corruptions are legalized.

  126. Scott says:

    It is without question unethical. The borrower has the cash to make up the difference between the principal owed and the sales price if she sold the home before moving to Iowa.

    She is not acting in good faith. The whole underlying assumption in our mortgage market is that borrowers will pay the note when they can. She can. Instead she’ll use her cash to buy another home in Iowa.

    Our government wants to bail her and others like her out.

    In my opinion, she wants to commit fraud.

  127. Gordon says:

    As someone that works as a mortgage lender I am particularly interested in this conversation. For the past four years I have tried to discourage customers making risky loans (in particular ARMs). I can tell you, from my own experience, that the problem is the result of BOTH unethical borrowers and unethical lenders. I lost business because I was not willing to lie or to make loans that didn’t make sense.

    Fortunately, most lenders and most borrowers are good people. The real shame is that all of these people will pay for the mistakes of a few.

    The greed that created this problem is no different than the greed of investors that created the Great Depression. All through history we have seen how greed has created inequities that either ended in famine, ruin and/or war.

    I personally am sick that these fools and thieves will be bailed out. Sadly, it will have to be done in order for an outright collapse of the market to be avoided. Because we cannot determine who is deserving or undersevering we will be forced to bail out all.

    If we do not do something we will see a future much like that of the Great Depression in the 1930s…which most economists agree could have been prevented to a degree if the government would have stepped in sooner.

    Will the bad get their just deserts? No. But, the bailout is not just about mortgages. Already, we are seeing the effects of this in a loss of jobs and a shrinking economy. We, the good people that make good loans and borrow responsibly will grudgingly accept the buyout so that we can continue to live.

    Hopefully, though, the governement will begin to prosecute those borrowers, appraisers, title companies and lenders that lied or stretched the truth in order to make a profit. There should be no acceptable excuse. “Everyone else was doing it,” “It was the only way I could get a house,” “It was the only way I could feed my family” and “I didn’t think it was that big of a deal.” are weak excuses for lying, overstating value, or signing something that you don’t understand.

    That’s my two cents

  128. Lurker Carl says:

    Legal and ethical are seldom the same animal.

    Legally, Lindsay can do what she pleases and suffer the consequences. The lender will take whatever actions available to recoup their money. Abandoning the house is a short sighted gain that will reap long term regrets.

    Ethically, no one should acquire an item and not pay for it. It used to be called stealing, welching or fraud. Now it’s called walking away.

    No one is forced to purchase a home or borrow money. It’s an action initiated by the buyer, not a bank or realtor or mortgage broker. It’s up to the buyer to know what they can afford and the lender to judge their ability to pay for it. I see greed on both sides of this table.

    As far as giving unsolicited advice, Lindsay revealed personal information that begged for comment and may border on criminal. If you don’t want someone criticizing your intentions, keep them to yourself. Either she was bragging or seeking advice, why else would someone reveal such information and not expect a comment?

  129. Durendale says:

    Most of you are view the situation as a simple matter of Trent’s friend lacking personal responsibility. As others rightly point out, though, assuming Trent’s friend had a no-recourse loan, the parties, both the bank and the consumer, contracted for the risk of walk-out at the front end.

    If it is true that, “a contract is a contract,” then why are you unethical for doing something that both parties agreed on the front end that you could do? Or are no-recourse loans themselves unethical–in which case aren’t both parties are equally to blame.

    The larger question is who is responsible for the mortgage mess in general and its cascading effects on the larger economy. And is collective action, e.g., the government, justified to prevent the effects from getting out of control.

    You can always say that “you should have had personal responsibility and not taken financial move X (an ARM, getting that credit card, you name it) and it’s your responsibility for the mess you are in, and don’t expect me to help bail you out, that would reward you.”

    But consider this. An individual consumer’s choices are not made in a vacuum. The title to a recent New York Times piece “Given a Shovel, Americans Dig Deeper Into Debt” says it perfectly. Yes, consumers made bad choices–but the financial institutions helped them do it; those choices were available to them. Shouldn’t we spread the blame around a little?

    Also, consider this. What if you live on a street neighborhood where 15-20% of the houses are going into foreclosure — because of bad individual choices on the part of each of the homeowners (and maybe the banks too if you buy what I just pointed out). Regardless of who’s responsible the houses are vacant and are becoming eyesores, ruining the neighborhood, making your property value go down, etc.–would you rather see some collective action keep those homeowners in the house, thus maintaining the neighborhood as a whole, or would you say “you guys made bad choices, don’t penalize me for your mistake.”

    The point is you are gonna get penalized if you do nothing and let the houses rot, or if you do something and bail out the homeowners and keep them in their houses. But in the second case, your house is still worth something and you’re better off as a whole than you would be otherwise.

    Or maybe you made a mistake to move into that neighborhood without making sure that everyone around you was making the same sensible economic decisions that you were.

  130. Durendale says:

    One more thing — in that NYT paragraph, I meant to note that not only the did financial institutions allow the choices, they made big profits off of your bad choices.

  131. BonzoGal says:

    @Adrian, comment #41: “But I must say that this post brings out what I dislike most about Trent: he seems so self-righteous!”

    You’re reading a BLOG- a personal weblog. Blogs reflect the values and views of the person writing them. If Trent didn’t share his opinions on important subjects, what would be the point of reading this? You may as well read some generic MSN financial advice site.

    Insulting someone in the comments of their blog posts is pretty rude. Trent reads these- nice thing to say to someone who is giving us all FREE advice (which we can follow or not per our judgement).

    Should Trent have given his friend his opinion? Close friends do, especially when it’s a serious matter. If a friend of mine were bragging about having an affair, I’d have to tell him/her that I thought it was not something to brag about.

  132. Amy says:

    Is it ethical for mortgage companies to not ever have live people to answer the phone to discuss your situation. The reality is, sh*t happens like layoffs, rising gas prices, rising food prices, home devaluation…should I go on? It is no wonder that people walk away when they try to hold up their end of the deal and work out an acceptable arrangement with the lender, but the lenders do not?

  133. Shevy says:

    I guess the question is, do you *want* to be friends with someone who thinks this is acceptable behavior?

    I wouldn’t judge someone purely for being foreclosed upon. While a lot of the trouble people are getting into right now is their own fault for buying houses that they couldn’t afford, there are also people who have medical bills, lose their jobs, are transferred to another city and so on.

    What I object to is that she can afford to buy a house *outright* in her new location, but is willing to walk away from her current obligations. I agree with the others who have said she should sell the house for the best price she can get and then pay the difference in cash from these stock options.

    Then she should put a huge downpayment on a new house in Iowa and take a mortgage for the balance. Her payments on the new mortgage will be much less than her current payments, so she should be able to afford them easily.

    I also think she should rent the current house out until it sells. If the rent is less than the cost of the mortgage she should be able to apply the loss against her income and save on her taxes, shouldn’t she? (I know it would work that way in Canada, just not sure about in the US.)

    The other point I wanted to bring up is that several people have said the risk of foreclosure is built into the cost of every mortgage (so that foreclosure doesn’t harm the lender) and this is not strictly true. What is built in is a certain amount based on the statistical probability of foreclosure. That’s based on historical percentages. The system works as long as the percentages remain realatively stable. If historically 5% of properties are foreclosed upon and this year 10% of properties are actually foreclosed upon then the lender is in big trouble.

  134. Lazlototh says:

    I’m a lawyer who negotiates contracts. I understand the emotion behind your reasoning, but it’s not bad faith to walk away from a mortgage – all a contract is is a promise that is enforceable under applicable law and gives the injured party a remedy – in fact, part of the purpose of contracts, from my perspective, is to take the moral angle out of it. Having said this, I would find it repugnant to walk away from a mortgage personally because my feelings about walking away from commitments are more stringent than what the law imposes.

    But as you suggest, the idea is highly unintelligent. A lender isn’t remediless – it doesn’t have to accept the keys and leave it at that, and the resulting credit damage, expenses fighting a possible deficiency judgment, attachment of assets, etc. makes the decision seem absolutely nuts. Anyone who is going to walk away should have to do so because of dire financial straits, since walking away from a mortgage when you have lots of assets is ultimately going to cause loss of lots of the assets you have or want to have – either because you won’t be hired by an employer who does a credit check, or you’ll be sued by the lender, or any other number of similar results. Better to sell the house and pay the deficiency if it’s 10 of the value, or rent out the house, or some other less self-destructive approach.

  135. Steve says:

    From an ethical standpoint, I do think that we have a fiscal responsibility to pay off our debts. But that shouldn’t be your friend’s worry at this point.

    Her worry is that if she simply lets the property go into forclosure, she is giving the bank the decision on what to do with the outstanding loan. That could haunt your friend.

    Let’s say that the bank, after the forclosure, takes a 600K home and ends up selling it for 350K. At that point, the bank can either go after your friend for judgement on the outstanding 250K, or they can write it off and file a 1099 with the IRS. This is where things get bad.

    If they file the 1099, then that is considered income for the year. So, your friend would owe taxes on the 250K. Worse yet, this is a tax debt, which means that it cannot be forgiven with bankruptcy, and that debt, with interest, will follow her around until paid. That also means that anything she tries to buy or borrow will have an nice little IRS lien slapped on it, which many creditors will avoid like the plague. And unlike bad credit or bankruptcy, it will NEVER go away until PAID IN FULL with interest!

    People who just walk away from a mortgage are taking a huge financial gamble. Why take that gamble if you can still afford the loan?

  136. Ben says:

    That’s certainly not unethical, it’s part of the risk. And proof by analogy is fraud.

  137. Mo-Town says:

    Steve:

    I believe the federal government passed legislation exempting the charged off portion of a mortgage from tax (and many states have followed suit) so this wouldn’t be a concern.

    Having said that, there are still a lot of downsides to walking away from a mortgage, like the hit your FICO score takes and the possibility that a potential employer or landlord will run a credit check on you.

  138. Lorax says:

    If we start to talk about ethics, we need to talk about philosophy, and we need to know that one person (or company’s) ethics may not be the same as yours.

    Would the bank do the same to you?

    Some banks would. They’ll freeze all HELOCs in a geographic area, even if you were expecting to be able to tap it in an emergency. They’ll mark you to market if you a trading on margin. Some banks will try to trick you into a higher mortgage payment.

  139. Ryan says:

    I have to agree with Trent, this is unbelievably unethical. What is even worse are websites like this one: http://www.youwalkaway.com/

  140. Sarah says:

    Two parties, the first with considerably more power and sophistication than the second, made an agreement that the second would pay the first money over a certain period of time. They also agreed–in detail–about what would happen if the second party didn’t pay the first party over time. The first party also charged the second party money to cover the risk that the second party wouldn’t pay.

    The second party stopped paying. The second party did not attempt to evade any of the consequences spelled out in the contract. In other words, the second party honored its word. What, exactly, has the second party done wrong here?

    I wonder if all the people who are getting so indignant about breaching contracts realize that businesses breach contracts CONSTANTLY, and that in fact our system is set up to *encourage* breach of contract where it’s economically efficient. Do you all go screaming at Wal-Mart when they breach a contract with some supplier? Get huffy when Microsoft breaches an employment contract?

  141. heather says:

    yes, it is unethical.

    However I forgive my friends for their mistakes.

    I would tell my friends, if asked, that I would not do the same thing in their position, and give your argument.

    But unless the advice was important enough to possibly ruin the friendship, I wouldn’t give it unasked.

  142. troy says:

    reading the comments leaves me with one main point.

    A mortgage (note and Deed) is a contract that spells out the terms of the agreement between each party.

    What some are failing to realize is the borrower hasmore than one way topay the lender.

    Sure they can make monthly payments OR…..OR…. they can not (default) and relenquish the collateral back to the lender, who then sells it and gets paid that way.

    Walking away from your mortgage monthly payment is choosing tonotpaymonthly, and instead pay through default. IT is explicitly detaile in the contract. It is absolutely not unethical.

    What would be unethical is if the borrower stopped paying the payments and was able to keep living and using and owning the home.

    Here is a ethics test. Suppose the situation was a bit different. Suppose the friend could no longer make the payment (lost her job, can’t qualify for a refi), and was contemplating walking away. She owed $200,000 on the home. It is worth $1,000,000, but needs $10,000 of repairs which she doesn’t have, so she decides to walk and not mess with it

    IF the bank forcloses they make $800,000. Is it still unethical?

  143. prodgod says:

    @troy…who would walk on a situation like that, with 80% equity??? Not a good comparison. And to others who say that banks don’t have the same ethics and would do the same to you….who cares? I don’t let other people’s lack of ethics influence my values. Guess I’m kinda self-righteous that way.

  144. Jeremy says:

    “What? That is precisely backwards. You cannot base your morality on money – that basis results in the unethical decisions that “Lindsay” considered. Instead, a sound morality insists on sound money and acts ethically even if the money isn’t sound. Morality and ethics come from the person, not the environment; Jeremy’s argument, at it root, is still insisting that an individual’s lack of ethical behavior isn’t their fault. Oddly enough, this is opposite of the stance Jeremy wants people to adopt.”

    Heh… money corrupts absolutely when it is in the complete control of those other than those it belongs to. For proof of this, you’d need to research the histories of the first bank of America and how it was visciously attacked in the press of the time when it’s charter came up for renewal. Almost all of America at the time realized that the bank was strangling them, and the press wasn’t afraid to say so.

    By the time Andrew Jackson was fighting against the second bank of America, the press and many powerful people had turned against him. Once it was destroyed, however, it came to light that the bank had paid massive sums of money to bribe congressmen and lent even more massive sums to many of the newspapers of the day.

    Morality is shaped by many things, including the views that one is constantly presented with. In today’s world, there is no question that the mainstream media is controlled by powerful financial interests – I have never seen a coherent argument for 100% reserve backed, sound money in any mainstream newspaper, including WSJ, NYT, WP, and more.

    Beyond this, arguing that morality shapes ones actions ignores the incentives that a financial system based on devaluing the dollar sets up. The dollar is worth just a couple of cents of what it was worth in 1913 (the year of the Federal Reserve Act), and less than a nickel of what it was worth by the time we went off the last vestiges of a gold system (in 1971).

    As Robert Shiller shows, housing prices barely outpace inflation in real terms. Without inflation of the dollar (and there was no sustained inflation prior to 1913, $20 bought one ounce of gold at the beginning of the 19th century and 20th century), housing would be a terrible investment, creeping up at 0.5% per year. Do you think in such a situation that a nationwide housing bubble could occur? And where would the money come for it?

    Sure, responsibility starts with the individual. But there are enormous incentives to not be responsible in today’s world, largely caused by unsound money.

    Again, though, none of this matters. An extremely inflationary policy by the federal reserve has resulted in

  145. Jeremy says:

    “What? That is precisely backwards. You cannot base your morality on money – that basis results in the unethical decisions that “Lindsay” considered. Instead, a sound morality insists on sound money and acts ethically even if the money isn’t sound. Morality and ethics come from the person, not the environment; Jeremy’s argument, at it root, is still insisting that an individual’s lack of ethical behavior isn’t their fault. Oddly enough, this is opposite of the stance Jeremy wants people to adopt.”

    Heh… money corrupts absolutely when it is in the complete control of those other than those it belongs to. For proof of this, you’d need to research the histories of the first bank of America and how it was viciously attacked in the press of the time when it’s charter came up for renewal. Almost all of America at the time realized that the bank was strangling them, and the press wasn’t afraid to say so.

    By the time Andrew Jackson was fighting against the second bank of America, the press and many powerful people had turned against him. Once it was destroyed, however, it came to light that the bank had paid massive sums of money to bribe congressmen and lent even more massive sums to many of the newspapers of the day. The bank was vilified for over half a century after this.

    Morality is shaped by many things, including the views that one is constantly presented with. In today’s world, there is no question that the mainstream media is controlled by powerful financial interests – I have never seen a coherent argument for 100% reserve backed, sound money in any mainstream newspaper, including WSJ, NYT, WP, and more.

    Beyond this, arguing that morality shapes ones actions ignores the incentives that a financial system based on devaluing the dollar sets up. The dollar is worth just a couple of cents of what it was worth in 1913 (the year of the Federal Reserve Act), and less than a nickel of what it was worth by the time we went off the last vestiges of a gold system (in 1971).

    As Robert Shiller shows, housing prices barely outpace inflation in real terms. Without inflation of the dollar (and there was no sustained inflation prior to 1913, $20 bought one ounce of gold at the beginning of the 19th century and 20th century), housing would be a terrible investment, creeping up at 0.5% per year. Do you think in such a situation that a nationwide housing bubble could occur? And where would the money come for it?

    Sure, responsibility starts with the individual. But there are enormous incentives to not be responsible in today’s world, largely caused by unsound money.

    Again, though, it won’t make a difference. An extremely inflationary policy by the federal reserve has resulted in a subset of our people being able to borrow far more money than they otherwise could have. At least some of these people will choose to put themselves in a better financial position by walking away, and this would not have happened without easy money.

    As prices revert to their long term fundamental values (a multiple of income or rental income), more and more people will choose to walk away. You can blame each person who walks away for being irresponsible (and I agree), but the fact is that without the Federal Reserve debasing the dollar this would have not occurred at all or at least not nearly to the extent it did.

  146. Wow Trent, look at the can of worms you opened up here. I gotta agree with you, though. I can’t stand people that take advantage of the system. I hope your ex-friend gets her a** sued by the lender.

  147. troy says:

    prodgod

    As I learned in physics, when faced with a difficult decision, use extremes. It brings clarity to the problem and the solution.

    The point of the example is not to test reality, but to test ethics or morality.

    If my example, however unrealistic it might be, forces you to examine your idea of “unethical” then the ethical”ness” is not in walking, but the degree to which either party “suffers.”

    Many commenters on here are saying essentially “walking is unethical.” What is unethical about it. The action or the result? That was my question.

    When the other party “gains” is it still unethical? Probably not in most opinions. Therefore many peoples morality of the question is determined by who gets “hurt” and by how much.

    That is an inaccurate measurement of morality, measuing the result, not the action.

  148. sweetcheese says:

    It is so reassuring to hear that we agree on this, Trent. My husband and I are in a somewhat similar position (though we aren’t saddled with the ARM difficulty) and have actually had someone suggest that we purposefully foreclose. It was a suggestion made out of love, but my gut spoke up immediately and I can’t imagine — in our situation — doing something like that. We didn’t make the best possible choice to begin with, but it was our mistake and we can, and will, ride out the downturn.
    Its a little sad to hear some people get so defensive in the comments because it leads me to believe that they have made some not-so-right choices and regret it. Hopefully we ALL learn from our mistakes the next go-round.

  149. steve says:

    @shevy:

    “What I object to is that she can afford to buy a house *outright* in her new location, but is willing to walk away from her current obligations. I agree with the others who have said she should sell the house for the best price she can get and then pay the difference in cash from these stock options.”

    She is willing to elect to stop making payments on the loan and to allow the current holders of the mortgage to keep the property.

    In effect, you are saying that the individual here (Lindsay) should provide a price guarantee for the house to the bank, even though there was never an agreement that she would, and even though the bank certainly would not (“if you decide to sell your house before the mortgage is paid, and you are not able to get enough for it to cover the remaining amount of the mortgage, we will make up the difference!”–Right!)

    Even though the market has dropped 10-20%, and there’s no saying at what price this woman could get in a sale, you are saying that she should shoulder the entire risk to protect the bank/current mortgage holder from any loss.

    @troy, who wrote:

    “What some are failing to realize is the borrower hasmore than one way topay the lender.

    Sure they can make monthly payments OR…..OR…. they can not (default) and relenquish the collateral back to the lender, who then sells it and gets paid that way.

    Walking away from your mortgage monthly payment is choosing tonotpaymonthly, and instead pay through default. IT is explicitly detaile in the contract. It is absolutely not unethical.”

    I am more inclined to agree with Troy. In these particular market conditions/historical circumstances, however, it is worth noting that by walking away from the loan and giving up the house, you are “paying” with a debased currency, as it were. The lender is getting the short end of the stick, and Lindsay is getting the long end.

    Again, no price guarantee.

    Many of the people who are aghast at Lindsay’s actions are applying their personal “person-to friend or neighbor” sense of morality to the business world. I am pretty sure that the mortgate holders would not hesitate for a second to turn Lindsay out if she were in hard times and unable to make the payment. They probably don’t know her, and don’t care how it would affect her if she were down and out. If they are a public company, they have a fiduciary responsibility to their investors and are constrained to take care of the investors’ money. That would mean turning a “hard times Lindsay” out.

    This is one of the rare historical times that the shoe is on the other foot vis a vis an individual vs an institution, when it comes to individuals who have financial resources and are holding a home they don’t need or want to hold. In Lindsay’s case, it’s her primary residence. For many upper-middle class people who have bought second homes, it’s the second home they will (and are) walking on.

  150. Rob Madrid says:

    It’s not very often that I disagree with Trent or that Trent gets his information wrong but when he does it’s a whopper and this time is no different.

    First off his example is completely wrong and 20 years out of date:

    His friend after loaning him $600 for the Xbox immmediately sells the loan off and collects a commission. Secondly because he is paid on commission and not on interest earned he has incentive to pump up the loan as much as possible.

    Suddenly it’s not an Xbox but a new 54inch Plasma Flat Screen, a top of the line gaming computer, new sound system etc, suddenly the loan has gone from 600 to 6000 and your commission has gone up accordingly.

    Secondly to help you friend you agree that the terms of the loan are no interest and no payments for 5 years when the whole amount is due. Not a problem because after 3 months you flip the whole system for a 100% profit.

    And if you friend can’t make the payment due, who cares you sold the whole loan off to some idiot in china. Not on your books.

    Secondly why is it that ethics only apply to us and not to companies. Is it ethical for Walmart to force local manufactures to move production to China destroying whole comunities in the process.

  151. Girty says:

    Trent, you hit the nail right on the head with regards to the mortgage.

    And regardless of if Lindsay asked your opinion or not, telling her the truth also tells her that you are her TRUE friend. A real friend will tell you something you are doing is wrong, even if it risks the friendship, because you love and care for her.

    If she can afford to buy a house outright, she can afford not to walk away from the mortgage of the first house. Period. It’s wrong and I’m sure she knows that.

  152. Rob Madrid says:

    Secondly Trent you were wrong in referring to this as an ethics problem. The correct term is Moral Hazard (and I’ll be the first to admit I maybe on thin ice on this so feel free to correct as needed)

    Moral Hazard is is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Basically it means that Fanny Mae and Freddie Mac can take on far more risk than regular corporations could because they are “too big to fail”

    For all you moralizers out there including you Trent you have two simple and very clear alternatives. Go through another great depression to give everyone their just desserts, or let the financial markets and the economy work out the excesses. Yes that means millions of homeowners walking away, some banks failing and alot of short term economic pain.

    Recently in Spain the biggest builder in the country went bankrupt after they were unable to get financing. Rather than bail them out the government, very suprsingly considering how important homebuilding is to the economy is, allowed them to fail.

    Very painful as alot of Brits lost their deposits and or homes but it means the market can sort out its own mess and in time will recover.

  153. Piggy says:

    It’s not unethical at all.

    It’s why down payments are there in the first place. By allowing loans without sizable deposits, the banks put themselves at increased risk to get more customers and make more money.

    You can’t blame the customer if the customer walks away. The risks and rewards in issuing a loan have always been there this time around the banks are going to have to lump it.

    There have been millions people kicked out of home and only 5 banks have folded?

  154. Rob Madrid says:

    Lastly an example of moral hazard.

    Northern Rock in the UK failed, as management forget economics 101 they lent long and borrowed short and got caught in a classic squeeze. A run on the bank signed the death certificate

    Now Trent here’s the ethical question. Do you, as the Government bail out the depositors or do as the chattering classes suggest and jabber about moral hazard.

    Gone would be your 12 month emergency fund, IRA, Kids college fund etc.

    But what the hey, it’s moral hazard.

    NOW as an aggravated subscriber to the simple dollar I’m going to immediately call customer service and cancel my subscription because I’m offended by what you said

    NOT, keep up the good work, couldn’t resist that one.

  155. reulte says:

    I think . . . words are harsher in print.

    Trent, I’d call her up and apologize for the email saying ‘something that important to your future needs to be discussed in person/on the phone. If you want to vent, I’ll listen. If you want advice, I’ll advise”.

    Keep your point of view about the ethics of it (after all, those are your ethics), but present various scenarios like the ones presented by your readers here. Perhaps when she emailed she wanted validation for an uncertain choice she is planning to make. Perhaps this is a family decision but having been made, she is obliged to follow through on acting as if the decision was unanimous. Explain your feelings about people (in general) who renege on contracts and bridge but that you’re still her friend (if you want to be).

    Remember – if she’s moving to Iowa, you’ll probably see more of her within your circle of family and friends.

  156. Wendell says:

    Wow…there is a lot of misinformation with these comments.

    I recommend to anyone who finds themselves in this situation to first contact your lender and see if it will be willing to do a Deed in Lieu. In essence, the borrower is giving a deed to the mortgage company to stop the foreclosure. Another option is to find a buyer and offer the lender a short-sale. These two options should be pursued prior to walking away from a mortgage.

    Another problem with some of the post, is the government is the a reason where are here in the first place. Cities all across the fruited plain were inviting lenders and banks into the cities to come up with creative financing so more of their constituents could become home owners. The City of Cleveland is a prime example of how local officials caused this big mess that they are in now.

    Several posters on here put the blame at the lenders. It is never someone else’s fault when you choose to make dumb decisions. The last twenty years has seen an explosion of information available to the average consumer. If you failed to do any research prior to purchasing a home then you have no one to blame but yourself for your poor choices.

  157. Sarah Beam says:

    I absolutely agree with you that walking out on a mortgage is unethical. Additionally, I think this government bailout is unethical as well. Reward those who pay their bills, and let those who don’t suffer the consequences. Otherwise, costs rise for us all.

  158. Carolyn says:

    Lindsay is a loser plain and simple and I hope she gets her just karmic reward for this little stunt.

    I’m sick of hearing people whine about their mortgages. It’s your responsibility to know what you’re getting into. I bought a house that was roughly 2/3 what I was approved for because it was the responsible thing to do and it’ll be paid off in 4 years. The government should not bail these people out. I couldn’t care less if they were living in tent (or SUV)cities down by river at the edge of down. It’s their own poor choices that put them there. There are plenty of books and websites that could’ve educated them on loan types and guidelines had they taken a few hours to educate themselves.

  159. swh says:

    Trent, I agree with you about being against the bailouts. There will be unintended consequences from this government intervention (as there usually are.) This program can only be paid for by taxpayers like you and me. Money will be taken from us and redistributed to those who are to benefit from this bill. This is classic wealth redistribution designed to remove risk associated with risky decisions. The risk and liability for this is now being borne by us. Wrong in so many fundamental ways! So if you are against a bailout, I assume that you are against the redistribution of wealth and that you are against assuming the risk associated with decisions that you did not make. It seems to me that you believe in taking responsibility for your own actions. If all of that is true how is it possible that you would consider casting a vote for Obama? It seems to me that his fundamental philosophy is rooted in many programs just like this.
    Love your blog! Keep it up.

  160. Jeffrey says:

    Read about central banking and its dangers to understand why this happened. http://www.mises.org has some very good articles that are understandable by the lay reader (non-economist).

    The politicians are grandstanding-don’t expect anything to be done in the interest of Americans.

    When I’m able to find a pre-foreclosure at a steep discount from somebody who made a bad decision, I will definitely not feel bad about the huge discount in price I’ll be paying for a home. Irresponsible, unethical people and the liars they elect will take it out on me through income tax and inflation enough the way it is.

  161. SteveJ says:

    I doubt anyone will read down this far (I barely made it myself!), but I hate the argument that the companies are immoral so it’s ok if we are too. The reason the companies get away with crap like this is because we don’t hold them to a higher standard, mostly because we don’t live up to it ourselves.

    I just got royally screwed by my electric provider (here in TX, you have the power to choose..hah..hah..gag me). I had a year-long fixed rate contract for an atrocious but incredibly cheap for the area .10/kwh. They couldn’t support the rate, went out of business. So I’m faced with a plethora of fees, etc as they switch me over to a default provider, and then I swap to another company with a reasonable rate (now) of .15 kw/h. So even though I did the responsible thing, shopped around, took a government recommended electric provider, and locked in for a cheap rate before the summer, I’m treated worse than someone that waited until the middle of July to look for electric prices. Then the bankrupt company sends me a bill for last month’s electricity. As much as they did me wrong, even though I’m 90% sure I could get away with stiffing them (after talking to my lawyer), I paid it. It’s the right thing to do. I hold myself to a higher standard and if I were to not pay it because they screwed me, then I’d be lowering myself to that level. Regardless of the monetary cost (which is only hundreds, not thousands of dollars), it’s not worth the alternative of taking the easy way out and going against my values.

    This isn’t a holier than thou diatribe (at least its not meant to be), it’s just that if you have the means, you have to live up to your own values. It’s inconvenient, I had to raid my meager savings, but it’s still what I feel like I have to do. Sometimes you are responsible and you do the very best you can and it still goes against you. That’s life.

    “The measure of a man’s character is what he would do if he knew he never would be found out” Thomas Babington Macaulay

  162. Tonia says:

    Amen Steve, if we all held to these standards we would not be in this housing mess! My husband and I had a choice to stay in the home we are in or move to “upgrade” to a much nicer home. As much as we fought over this “opptournity” the bank was giving us” I had to bring in 2 financial advisor’s (family and friend) to convince my husband that this loan was not in “our” best interest. The topper was when he realized that the “free refinancing” was not really free, it was built into the loan. THANK GOD we did not buy, in that neighborhood alone there are over 30 foreclosures!

    However, Trent a lot of what you talk about on a daily basis covers most people in this situation. They just have no clue, don’t think about tomorrow, and then expect the government to bail them out. Or it’s everyone’s fault they are in this mess, not their own. I call it like I see it, and as I see it around here it is pretty bad.
    Personal Responsibility is something I have seen on a decline since 1990. May have been longer but that is when I noticed it.

    It is all about me and what is in it for me. On a more basic level, I was going into a grocery store a couple of weeks ago. I watched, as I approached the entrance, an elderly woman barely able to keep her balance with her cart struggle to get out the entrance. This was because a younger woman with a stroller was trying to get in at the same time, there was simply just not enough room. The kicker was the younger woman was telling the older woman to “move over” while it was plain for anyone to see she was struggling with her balance.

    The “responsible thing to do” would have been for the younger woman to wait a couple of seconds for the older woman to get through the door. Not to harass her for getting in her way. If you are wondering there was only one door in operation at the time.

    It is all the same, kinda like what I have heard a presidential candidate talking about. Personal change, Corporate Change, Government change. However like any other great change in America it has to be “grass roots” based. I hope I see it in my lifetime. With what I am reading on this board and seeing with my own eyes, I have to wonder if I ever will.

  163. wren says:

    After having been a reader for a little while, now seems like as good a time as any to respond. First, I don’t see, in any of your posts, the self-righteous tone others have suggested, but rather the tone of someone who’s ‘been there and done that’ and is trying to pass on a bit of what you’ve learned to help others potentially avoid the pitfalls that can await. I also like that you get into personal things, and give opinions and everything else, and don’t just stick to financial matters. You’re not a financial advisor, as you clearly state, so it only makes sense to hear your personal opinions, on your personal blog. Keep it up!

    Second, I have to agree that you did what you thought was right when ‘Lindsay’ told you her short-term future plans. If a friend of mine told me something like that, you can pretty much guarantee she would get to hear my opinion on what she was going to do, whether she wanted it or not. The reason being, she told you the information for a reason – to brag, to explain, to make it seem all right considering what she wants to do. There are plenty of things we tell others that we don’t want opinions on, but support. And then there are plenty of things we tell others that we want support on, and to hear that we’re doing the right thing. Not all of those are necessarily above-board, but we want to know that someone would do the same, if they were in our shoes. I imagine it was a bit of a shock to her, based on her lack of reply to date, that you responded as you did. Perhaps it gave her something to think on, or maybe it made her feel as some people have said here, that it was an unsolicited opinion from a self-righteous Chatty Cathy, and so she’s better off not talking with you again. But, then, the same could be said for you… you are better off not talking with her again, if she can’t respect your views, even if they differ from hers.

    Keep on with the posts, Trent, I look forward to reading more. :D

  164. Becky says:

    Trent, I am proud of you for your stand on this one!!!!!! Real life doesn’t feel good a lot of the time, and it sucks. Plain and simple. If your friend does this, it will always be in the back of her mind, and she will never forget that she did it. She will always feel a little shame. She has several options–they may not be ones that she wants to consider, but she has several. She can stay in the house until the value bounces back–it will–she just has to be patient. She can sell the house and cash in her stock options to pay the balance. I’m 52, and young people these days don’t seem to be very patient about what they want. It ain’t easy to be a grown up, but making the right decisions is what makes you a “grown up”. That’s the growing part of it.

  165. Brian says:

    Just because the value of your home has decreased, doesn’t mean there is financial hardship. Your mortgage payment has nothing to do with the market value of your home – only what you paid for it.

    There is no excuse for walking away in this situation. Regardless, there is no such thing as walking away. She will default the loan and destroy her credit. The bank has no obligation to accept the keys. That is not how mortgages work. The home is only security for the loan. The bank will certainly go after her, especially in this market.

    This is a perfect example of someone who had no business buying a home. She has no idea how a mortgage works. I hope the bank gets the money they are owed from her.

  166. Tom says:

    I would say that it is unethical. Let’s say that Lindsey were in the opposite position and had 10% equity in her home. If she were to move, would she tell the bank to keep the 10%? Absolutely not. She would take it for herself.

    When she makes money, she gets to keep it. When she loses money, she transfers that loss to the bank and walks away. That sounds better than the stock market — you’re guaranteed not to lose any money on your investment.

    That sounds unethical to me. Sure, it may be legal right now, but I am sure in the next few years people like Lindsey will have caused the lenders to waste a few more trees by adding a few more papers for us to sign at closing.

  167. Bret says:

    We’re in a different position. Our ARM is going to reset in a few months. My wife is self employed and her income has gone down quite a bit. We’re going to give our lender the choice of either lowering our interest rate 7.75 down to 6.75 and making it fixed or walking away. Without the reduction we can’t afford to stay in the house due to loss of wives income. Our house is worth about 30% less than what we payed for it. We feel it’ fair. We get to stay in our house and the lender still gets payed a fair interest rate on the full loan. Any thoughts??

  168. Brian says:

    Tom, you forgot about interest payments – the lender loses money every month they have a balance on the loan.

    I think the key that many people are missing here is that both sides agreed to this outcome. The person who walks away isn’t screwing the bank, they’re taking a course of action given to them by the bank.

    How can it be unethical to do something you’ve been given full permission to do by the entity you’re doing it to?

    This thread really makes me envy bankers. They take risks and many people feel morally obligated to eat the downside for them, and pay for the privilege. Unreal.

  169. Brian says:

    Of course, by “lender” I meant the opposite…

  170. Karen says:

    Regarding Trent’s post #77 – Right on!!! Can’t please everyone so I quit trying a long time ago. Love the post and all the comments it generated.

  171. gr8whyte says:

    I think it’s unethical when Trent’s friend has the money to cover the loss. It’s not like she’s broke or starving. For people in real financial difficulty, there may be no other option but foreclosure, perhaps even bankruptcy, but it’s a last resort, not a first option. No one should lend her any money forever; she’ll walk if she’s ever upside-down again.

    No, it’s not just a business transaction any more than armed robbery is a business transaction. One robs with a gun, another with paper and pen (by walking away) — same thing. Neither is a business transaction. Shall we default on our national debt and chalk it up as a business transaction?

    Re. Sarah’s comment #136 “… our system is set up to *encourage* breach of contract where it’s economically efficient. Do you all go screaming at Wal-Mart when they breach a contract with some supplier? Get huffy when Microsoft breaches an employment contract?”, ethics in our society has fallen so low that contract breach has become a routine business tactic. No, third parties should not be screaming at Wal-Mart or huffing at Microsoft because they have no standing but harmed parties should, and third parties can comment on Wal-mart’s and Microsoft’s actions on blogs like TSD. The fact that harmed parties aren’t screaming or huffing does not legitimatize Wal-mart’s or Microsoft’s breaches. Breach of contract as a last option is OK. Breach of contract as a business stategy is unethical. And people on this thread have a legitimate reason to scream and huff because their home values are being adversely affected by the mortgage crisis.

    Ira Glass has a great interview with mortgage brokers on the “This American Life” series from Chicago Public Radio. It starts from Grenspan’s rate cuts which led to investors digging around for better returns and they found the mortgage securities market. Money poured into the mortage market and the rest is history. To listen, go to thislife-dot-org, click the “On The Radio” tab and look for “The Giant Pool of Money” first broadcasted on 05/09/2008. It explains Collaterized Debt Obligations and why it’s virtually impossible to get your loan renegotiated if it’s been CDO-ed.

  172. Ceekay says:

    Walking away from a loan is unethical and immoral. You said you would repay, you gave your word.

    If your ethics don’t matter to you, then think about this: Your credit history will be trashed, your ability to get another loan will be severely affected (expect to pay twice the interest next time), and when you are applying for a job in any institution or job where you might handle money or any place of employment that runs credit checks expect NOT to get the job.

    My sisters and I do a lot of investigating before we make property loans–which we do for extra income–and any one who has walked away from a loan will not even be considered: not ever. How can I trust a person who has no honor?

  173. tightwadfan says:

    I am another reader who sees this an amoral issue. I don’t think it is a personal or ethical issue, just more of an unwise financial decision.

  174. tightwadfan says:

    I have to qualify my statement by saying that I don’t think this is an ethical issue as long as your friend is going to accept the consequences of walking away as stated in her contract with the bank. If she is going to be using some kind of deception to avoid trouble then her actions become unethical. (Of course at that point the bank could go after her for fraud).

  175. AZ joy says:

    It is unethical/immoral/just plain crappy to break your word. Just because default terms are listed in the contract, that does not wash the breaking of your word clean. This is exactly what is wrong today – on both sides of the coin. It is what is wrong with ‘big business’ and it is what is wrong with ‘average joe’.
    My home is less than three years old, as is our whole neighborhood- but I now live in SQUALOR, because so many of my neighbors have walked away. My across-the-street neighbor owns land all over the place, she and her husband make great money, and -she laughed as she told me- they can afford the payments, but why should they. Since after all, there’s “no consequence” to walking away since so many others are doing it right now. This will be the THIRD home she has walked away from. They bought it zero down, interest-only ARM… with a 20% adjustable HELOC… then re-financed at the top of the bubble, pulled out all of the cash and bought three nice cars, then tied a 100% financed backyard pool/landscaping package to thier deed in the amount of $45K (not sure how that worked) KNOWING that they were going to walk away. They stayed in that house for FREE for nine months, and this being a non-recourse state… are apparently not going to see any consequence. They live less than a mile away in another big beautiful home with thier beautiful cars… meanwhile their abandoned home and all the others like it in my neighborhood have dragged down the values so much that the house I owe $290K is worth about half that. Their house is now up for sale for 166K and has been since March- you can’t GIVE a house away in my neighborhood. That hurts ME. That hurts my CHILDREN. THAT is what is unethical.

  176. Kelly says:

    I do not understand the logic behind , ( they are not as financially savvy , as you are Trent )statements .
    Can “they” READ !!! When my husband and I decided to buy our first home 24 years ago , I checked out finance books from the library and read and reread the chapters on buying a home .( This was just before the bottom fell out of the housing market in Houston , and a lot of people walked from their mortgages) . We looked for a long time before we bought a home , it was obvious that homes were overvalued and we had several realtors offer us more home than we could afford . We settled on a smaller , but affordable home and payed a fair , but not overvalued price for it . I would have loved a larger home , but I was a stay at home mom during my son’s early years and that was the most we could afford . We have worked hard , done without , saved our money and always payed our bills on time , through good and bad times . We received no money or loans from the government and( as we were the oldest children from large families ) , no help from our families . We have no debt , we own our cars , and we have savings for retirement . We are not college graduates ! I often feels the government penalizes the responsible and rewards the irresponsible !!! I just do not understand why I should pay taxes so that someone else can have a higher standard of living than I do ?

  177. Kelly says:

    I think what most people fail to understand is that their ” moral ” choices often affect more than themselves , and in the case of walking from mortgages and other contracts , can have negative consequences for us all .

  178. Brandon says:

    As a recent first time home buyer, I had to go through the equivilent of a full cavity search to get approved for a loan.

    Is it “ethical” to walk out on a loan? No. Is it “legal”? Yes. There’s a difference. Immorality isn’t illegal.

    If my home value plummets for some reason in the next year or two would I consider walking away from it? Depends. Do I want to spend my 30′s in an apartment because I made a bad decision now?

    I think it would depend on how upside down in the loan I was at that point, and if the $20,000 I would lose now would be worth the money I would lose in the future by paying higher for every type of insurance imaginable, as well as a the inability to buy anything on credit ever again.

  179. gt says:

    this isnt unethical, it’s wise. the banking system is stupid beyond belief. of course, why should they be smarter when they can just get bailed out and/or give everything to a gse to handle the risk.

    let’s see what i SHOULD HAVE done. i should have bought a house for 600k two years ago with 0 down. refinanced and got a good 120k out of the house somehow. walk away from the house today with the 120k and go somewhere and buy a house outright for 120k. cha-ching!

  180. deepali says:

    Personally, I find it a bit unethical for a bunch of strangers to discuss someone’s difficult personal situation as if they have all the answers to life. It definitely smacks of self-righteousness.

    To that end, I am sure that every single commenter here has engaged in some behavior that I find unethical. So why the throwing of stones?

    This post and its comments have left a bad taste in my mouth. It makes me not want to come back for more…

  181. Emily C says:

    I fail to underestand how someone else’s behavior influences just how “ethical” my behavior is.

    In signing my name, I agree to a contract–even if the other party is acting in an “unfair” manner. It doesn’t give me the right to deceive.

    I value honesty and honor. I think it’s shameful to default on an agreement such as this, and your friend likely knows it.

  182. AndrewGearhart says:

    This entire discussion reminds me of this Hyundai commercial:
    http://youtube.com/watch?v=DaTDVU19oOU
    The entire legal system is at fault here… it isn’t limited to credit. But we’ll focus there to stay on topic. Things are too difficult for the average person to follow completely and too easy to simply move forward and agree to without full consideration of the facts. When my wife and I took out our first mortgage, we used a program offered by the state housing finance agency to guarantee the loan. It meant that we received a pretty decent rate, but we were also required to attend a two hour class about financing and budgeting. While the class was directed towards folks with significantly less education than we have, it was a strong reminder that we, in-fact, were making a commitment and that we needed to structure our lives correctly to keep that commitment. All lenders should do this and should require all borrowers to do this… and I’m not just talking about when you buy a house.

    And, just for reference, I’m not talking about legislating this… the lenders should be smart enough to do this on their own.

  183. Johanna says:

    @deepali: By your reasoning, since none of us is perfect, nobody has the right to discuss the ethics of anything. And that’s taking it a bit far, wouldn’t you say?

  184. guinness416 says:

    Deepali, I was thinking a similar albeit more cynical thought … so many commenters who “know people” who walked out on four homes/ran up seven figures on their credit card/ran over a kitten and laughed. While the commenters themselves are walking uphill both ways in the snow to work to pay off a home they bought for $300! Who knows, maybe some of them are even telling the truth. And all based on one side of an emailed conversation which presumably has been changed to protect the guilty. Moneyblogs can be like the comments section at the Daily Mail sometimes.

    There are some good and thought provoking comments between the young-fogeyish rants though, I’ve enjoyed the discussion.

  185. Dawn says:

    I haven’t read the other comments, so this may have been said already. While it is obviously unethical to walk away from a mortgage (would you walk away from any other contract you sign?), sometimes people in difficult situations have no other options. That doesn’t appear to be the case with your friend, but I don’t know her situation and wouldn’t presume to judge her.

    At any rate, I just think it is important to note that the government really isn’t bailing out individuals. While it sounds nice to say they are helping the beleaguered homeowners, the government is really bailing out the banking industry. The banks are not in the real estate business and they don’t want to get into it. The very last thing they want to do is have to take back and sell a lot of houses. Unfortunately, due to banking deregulations (another issue altogether), those mortgages have been securitized and sold on Wall Street, so the banks can’t just change the terms without some intervention. When the government forces the banks to reset the terms of all those loans, it solves their problem.

  186. realtychic says:

    Very, very, very interesting posts on both sides. Thanks for bringing this one up, Trent. However, I have to disagree with you on it. I am a small-time real estate investor. One of my favorite ways to make money is to buy a run-down house, add value to it by repairing it, and sell it on contract. Let me tell you, when I sell a house in this manner, I know that I am taking a risk. This leads me to several conclusions.

    1) Since I can’t control the choices of the people to whom I’m selling, I have to protect myself with the contract. To me, it’s not a personal or ethical matter if the buyers walk away, it’s a business and legal matter. (Now, if they purposely trash the house in the process, before defaulting, distroying the property they are going to return to me, THAT is unethical!)

    2) Since this is a person I am making a contract with, I need to ensure, to the best of my ability that this person is able to fulfill the contract. Moreover, I need to make sure that it is a good enough deal for the buyer that they have an incentive to stay in the deal. I can’t scalp a person and think they are not going to walk away from the deal when something better comes along. It’s not their job to put my interests before their own, it’s my job to protect my own interests, but also to deal fairly with the other party.

    3) In my personal opinion, it is good business for me to treat others with respect and honesty. I have often told people that a decision that was best for me and that they were willing to go into was not in their own best interest. (For example, as a real estate sales person I have pointed out to my buyers that buying a house without a sufficient down payment is much riskier that putting at least 10% down and advised them that it might be in their best interest to wait a while before buying, even though this would mean no commission for me.)

    However, in my opinion, and based on my (admittedly limited) experience, banks were not paying any attention to any of these three rules. The banks created a situation in which the only logical choice at times is to walk away. I consider myself to be a very ethical person, and I think my actions would bear this out. However, I don’t think that walking away from a contract that would prove toxic to you and to your family, ruin your quality of life, and fill your life with stress is unethical. In my opinions, the banks are suffering the consequences of making poor decisions. Unfortunately, the rest of us will, as well, because the effects will trickle down through many levels of our economy.

  187. Sarah says:

    “While it is obviously unethical to walk away from a mortgage (would you walk away from any other contract you sign?)”

    People. Seriously. If you stop paying your mortgage and suffer foreclosure, you are not walking away from your contract. In fact, you are honoring your contract by complying precisely with the terms spelled out in advance. You and the bank AGREED IN ADVANCE that if you did not make your payments, the bank could take your collateral, and that was the extent of the recovery the bank could receive. The bank even charged you extra money to cover the possibility that you might do this–you’ve ALREADY PAID FOR THIS POSSIBILITY. Is there someone out there who actually thinks the bank didn’t understand the terms of the mortgage, or that the bank was in some way coerced (even informally) to sign the mortgage?

    Reading blogs like this really makes it clear to me how Wall Street can just go on fleecing the rest of America–it’s because people don’t inform themselves. Corporations can go on happily defaulting on payments when it’s economically better for them to do so, but an individual can’t. Corporations can hand you the risk of loss if they can draft the contract that way, but they can’t suffer a risk of loss–that would be unethical. I think I have a fairly demanding sense of morality, but when we’re talking about a contract between equals (or a much more powerful and well-informed party and a much less so, which is what the actual scenario is here), I see no problem with the weaker party doing precisely what the contract spells out in detail it may do.

  188. SteveJ says:

    “It’s not their job to put my interests before their own, it’s my job to protect my own interests, but also to deal fairly with the other party”

    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.

  189. David says:

    Thank you, I agree 100%. And for anyone saying that the banks aren’t ethical or that they don’t have any scruples – when they lend you money, you are signing on the dotted line and agreeing to whatever they are telling you are the terms, and you are agreeing. Basically, you are saying that banks are not bad when you want their money, only when they want it back. We borrow money, then we pay it back. It’s how it works.

    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.

  190. Johanna says:

    An action that has negative consequences for other people isn’t necessarily unethical. Is it unethical to use coupons? By combining coupons and sale prices, it’s possible to buy items for less than they cost to produce. So somebody (either the manufacturer or the retailer or both) loses money when you purchase that item, and they have to raise prices on everyone else in order to make up the difference. But you’re not doing anything wrong by taking advantage of those offers, because the manufacturer and the retailer agreed to them. Ethics is tricky business.

  191. Rob in Madrid says:

    Wow!

    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.

  192. gr8whyte says:

    Commenters have said Trent’s friend’s default is OK because it’s in the contract and companies do it all the time. These commenters fail to recognize the difference between using default as a last option when all else fails versus using default as a business strategy. The former is OK; what else is left after all else fails? The latter is unethical because even before the contract’s signed, the unethical company’s already planning to default should economic conditions go against them, and well in advance of any possibility of financial trouble. The bank doesn’t really want your house, the bank wants a stream of payments that you’d agreed to pay. You’d agreed to pay the stream of payments and accept the home and all the financial risk that comes with it in exchange for getting the loan. Home value’s dropped 10% so you walk away? It may be legal but never ethical.

  193. George says:

    @gr8whyte said: “You’d agreed to pay the stream of payments and accept the home and all the financial risk that comes with it in exchange for getting the loan.”

    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!

  194. Moral Hazard says:

    The housing bailout will encourage this same behavior to repeat in a few year’s time after memories fade. The benefits go to the irresponsible. The responsible pay their bills. Thanks Congress.

  195. gr8whyte says:

    @ George

    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?

  196. Roger says:

    Wow, this has been a fascinating discussion, covering a lot of issues I wouldn’t have considered before reading, but then, the really good blog posts (and resulting conversations) usually do.

    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.

  197. Francine says:

    The government bailout for people who walk away is really our tax dollars. Now how do you feel about it being okay to walk away? It makes me crazy angry. I could have done what they did, but I chose not to buy a home I knew I could not afford. The rest of us are paying for their greed and their mistakes. They are adults and they signed on the dotted line. They should pay what they owe and suffer their own consequences.

  198. SteveJ says:

    @Roger – I think you are confusing morality with fairness. Is it fair that I pay my full property taxes while other people find ways around it? No. Is it moral for me to pay taxes while others don’t? Yes. And it makes me a sucker. So be it. It’s still the right thing to do, somebody’s got to pay for basic community services.

    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.

  199. Trouble in Suburban Detroit says:

    I do not want to walk out on my mortgage but I don’t think I have any other options. Never have I missed a payment in over 9 years. I have been unemployed for 10 months and still I haven’t been late. I used all my 6 month rainy day money and will be not be able to make the payment this month. It has been on the market for the past 6 months without any offers or interest so a short sale wouldn’t even work. I have no other savings, I can not refinance without a job. It is a fixed mortgage at a decent rate. I bought a modest affordable house in my price range. I was not greedy or impulsive. I thought things out very carefully. I just did not expect the lay off and the job market to sour. My family does not have the capital to “loan” money. I am not an unethical person just unlucky. If anyone has any advice, I would gladly welcome any legal solutions.

  200. gr8whyte says:

    @ Trouble in Suburban Detroit : For what it’s worth, I’m very sorry to hear about your situation. I certainly don’t think you are behaving unethically in walking out. You did everything right but was sabotaged by events beyond your control. The best of luck to you.

  201. SteveJ says:

    @Trouble in Suburban Detroit: I’m also sorry to hear about your situation. I wish I had some good advice for you. I’ve never tried it, but is it possible you can negotiate with the bank? It really does sound like moving is your best option though. My sister is dealing with issues in the area, just can’t sell her house in Royal Oak.

    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.

  202. Linda says:

    Banks have not been ethical. They’ve been greedy. They’d be in much better shape had they taken the responsibility to ensure that people could afford the homes the banks were lending money on. And banks are taking big hits for their behavior.

    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.

  203. Tim says:

    I think your persona as personal finance blogger and what you typically stand for – personal responsibility, common sense finacially, and smart consistent investing has made you a tad myopic on this topic.

    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!

  204. Another winner here Trent. I’m sure you ll get your share of bashers at your Ethical Stance. Here’s my 3 cents

    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

  205. Mike says:

    If we had an ethical banking system based on sound money, GOLD, then it would be unethical to walk away from your promises.

    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!

  206. Melissa says:

    First let me say that I love thesimpledollar.com and that I really appreciate your insight on most issues. But on this one I think you are just a little off base. Maybe just a little naive.

    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.

  207. Kris says:

    I swore I wasn’t going to comment on this already heavily commented post from a year ago, but I just have to. The person above me – I hold no judgment against those kind of circumstances. But if someone could explain to me why it’s ok to walk away from a house because it is upside down/under water/whatever – NAD THEN go ahead and buy a new one CASH?! Sorry, just not ethical. Whether or not the banks/mortgage securities/whatever are ethical is not the point. My ethics are not based on theirs.

  208. Penny says:

    I think walking away from a personal obligation (whether it be a mortgage or not) is atrocious. It’s immoral, it’s destructive to banks, home owners, the community, property values, taxes, the next generation who is watching, etc. Only in an incredibly dire situation should it happen, and shame/guilt should most definitely be attached to the decision.

    I bought my (first) home in 2005. With an I/O arm. I got no gov’t money. I am “upside down” right now, certainly. But I am not going anywhere, b/c it’s my home, and I have an obligation to pay back the loan I took out to purchase my home.

  209. David045 says:

    I’m considering walking away from my mortgage simply because we can’t afford the payment anymore because of the “bank” has managed to increase our payment by nearly $200.00.The bank says it is due to escrow shortfall, whatever that means.
    My wife hasn’t worked in nearly two years due to ill health and my pension is streched passed the breaking point. We are a family of five.

    I need some freakin’ options!!

  210. American says:

    There are 3 types of American.

    1 – The RICH & POWERFULL (big banks) who got their bailouts in the 1st month of the financial meltdown.

    2 – The really smart Americans who did a STREAGIC default on their mortgage and got to live rent free for more than a year ()

    3 – The Majority dumb who are still paying a mortgage of 300000 when the house is not even worth 200000.

    IF the big bank and the Hedge funds can do it why cant the average American DEFAULT………it is all about the MONEY honey.

    Credit scores is a overrated piece of junk just required only 3 times in life ………. To buy a car (Which most already have) / house (not required staying on rent) / pay for college (I am 40 and never going to college)……….

    People forget the MORAL obligation ……..just default if it makes financial sense ………..it is a financial decision not a emotional one ………

  211. bryan says:

    i’m a little late to this conversation but i think this one of the most absurd articles ive seen. how do you compare a written agreement with a bank to an agreement to repay a friend…its apples and oranges…or the comparison of a bank kicking you out when prices go up, again a horrible example….banks make loans for financial gain not because of some moral compass. these loans come with contracts that spell out the terms including those of default. so now the contract isnt good enough? there is some higher expectation one should be held to? this is nothing more than a financial decision with in the confines of a written agreement. Corporations, including banks walk away from the obligations all the time, many times outside the terms of a written contract.

  212. Ron says:

    My wife and I bought a home and walked away from our underwater home. Ethics are a tricky thing. Was what we did unethical? I dont think so. We played by the rules. The banks lent money knowing people wouldnt be able to pay. The banks, in some cases, committed fraud in sticking people with bad loans. They made business decisions that would pad their pockets in the short term. Then relied on the government to bail them out. We made a business decision as well. We bought at $300,000 and the house sold for $110,000. The odds that we would ever get back to par were virtually zero. As for all the BAD CREDIT doomsday stuff. A lot of that is propoganda spread by the banks. It has been 2 years since we walked. Our credit scores are between 700-710, good enough to get any kind of loan (they were over 800 prior).

  213. Karen says:

    I agree that walking away is unethical. Nobody forced Kelli to get a mortgage. She probably made an assumption that the housing market would continue to go up; assumptions are not guarantees. I’ve noticed several comments saying that Kelli is being affected by events beyond her control…aren’t we all? My parents taught me to have a rainy day fund so that if something happened I’d be able to handle it. Trent Hamm is also right about the investing adage. Kelli bought high, and if she’s going to walk away, she’s locking in her losses and killing her credit score. Maybe she feels that she made a mistake in buying her house at that price, but living with our mistakes is the #1 way to learn not to make a similar mistake in the future. What are Kelli’s kids learning about mistakes and promises in this episode?

  214. Don says:

    First I must say that walking away from the mortgage is simply wrong. I did not notice any mention that any dollar amount that is written off is taxable income for the borrower. While I won’t disagree that some lenders are very shady, it seems that the initial complaint is that borrowers are underwater because the home value is now lower than the amount owed. This is not the lenders fault. Iv’e been in the credit industry since 1976 and it turns my stomach when people walk away from their debts because they are no longer convenient.

  215. Connie says:

    Lots of comments here, so I don’t know if was covered earlier. If you live in a “recourse” state, then you would still be responsible for the difference you still owed the bank. If you didn’t pay them, which is obviously the intention in such cases, I agree that it is not a moral thing to do. I’m not so sure that I would call it “unethical”, since in the business world, that usually implies lies or deception, violating code of conduct for certain jobs and professions (confidentiality, for instance, or conflict of interest).

    HOWEVER, if you live in a non-recourse state, the mortgage agreement with the bank says you either pay them back the loan OR you give them the keys. Your choice. By walking away, you are simply selecting an option that is in the contract. You don’t have to pay the difference and can’t be sued for it.

  216. Sue M says:

    I haven’t read all the replies to this, but I am now “walking”. The homes in my area (next to Detroit, MI) are wonderful! Very 50′s, to be exact! Most are well kept, mown lawns, trimmed trees, painted…well kept. I owe about $140K from several years of refinancing when my soon-to-be-ex at the time stopped paying for anything, including some of the kid’s college expenses. I had jobs, but not earning enough money to pay everything. Then, economic downturn, I lost my job, and ended up “charging” my house payments so they would not appear as a negative on my credit report.

    I waited about 5 years before putting the house on the market, considering the downturn in the economy. Now, I have had it. I’m paying about $1400 monthly for what might bring in about $40K in purchase. I currently have job issues again. I don’t have $1400 a month just for housing. I own my car, my motorcycle (yes, it’s my second vehicle as a single person), and most of a lot of things. Many “things” have been jettisoned through garage sales, free cycling, cheap cycling, and just plain donations. That HURTS a LOT! I have lots of resumes out there, and I’M A NURSE, but as I am older, not a lot of interviews. I have advanced my skills past what any manager wants to deal with. I am still paying on one credit card and one school loan for my daughter who refuses to acknowledge it’s hers…and since I refinanced it in my name to get AWAY from Sallie Mae…it’s mine.

    So, should I keep paying $1400/month on a house that maybe is worth $40,000 on the market? The house down the street, similar property but smaller home, just sold for $30K.

    Yes, I promised to pay to the best of my ability, but my ability is being CHALLENGED by the current market. It’s NOT MY FAULT the market crumped.

    I may find renting an apartment, and maybe purchasing a used mobile home in the future, might be a better option.

    Once I find a job.

    Trent, I love your postings, but not much applies to the near-retirement senior facing my constraints.

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